Greenspan Has a Faulty View of the Landing

Buffett's approach is light on data, but the data he does cite agree with the details of Greenspan's picture. Last year, we purchased $618 billion more in goods and services from the rest of the world than we sold. To pay for this current consumption, we're selling off our accumulated national wealth to the rest of the world at a rate of $1.8 billion a day. "Consequently, other countries and their citizens now own a net of about $3 trillion of the U.S.," Buffett wrote to his shareholders recently. Our overseas borrowing to fund the current account deficit is equivalent, he notes, to a family that sells off "part of its farm every day in order to finance its overconsumption."

Same Data, Different Conclusions

What's so striking is that from this remarkably similar picture of the current situation, Greenspan and Buffett reach almost diametrically opposed conclusions.

To Greenspan, it's no biggie. Even though we're running that huge trade deficit, the dollar's real exchange value, despite its recent decline, remains above its 1995 low, he told the Council on Foreign Relations. Interest rates on Treasury notes maturing 10 years in the future remain very low, despite the size of the federal deficit and the huge retirement obligations we're putting on the books. And there's no evidence that households are facing "inordinate financial pressures as a consequence of record-high levels of household debt relative to income."

The U.S., Greenspan notes, almost with surprise, "appears to have been pressing a number of historic limits in recent years without experiencing the types of financial disruption that almost surely would have arisen in decades past."

Buffett, on the other hand, believes that we're headed for real trouble. "A country that is now aspiring to an 'Ownership Society' will not find happiness in -- and I'll use hyperbole for emphasis -- a 'Sharecropper's Society.' But that's precisely where our trade policies, supported by Republicans and Democrats alike, are taking us."

Buffett Sees Dire Consequences

Buffett isn't forecasting economic collapse, because he believes that foreigners will continue to lend to us. Foreign investors, he wrote in his letter to shareholders, "may view us as spending junkies, but they know we are rich junkies, as well."

But the consequences are still dire, Buffett believes. If current trends continue, a decade from now, just at the time when we'll need every dollar to pay for the retirement benefits of baby boomers, the U.S. will be sending 3% of its current annual output to the rest of the world as interest on the debt run up by its past consumption.