Greenspan blows a 'Jackson Hole' in candidates' election promises

As President George Bush and John Kerry outbid each other in rosy promises, Alan Greenspan yesterday brought the election debate on the economy down to earth: Sooner or later (and probably sooner) the US had to stop living off foreign credit, and cut back the social entitlement programmes which threaten to engulf the federal budget.

As President George Bush and John Kerry outbid each other in rosy promises, Alan Greenspan yesterday brought the election debate on the economy down to earth: Sooner or later (and probably sooner) the US had to stop living off foreign credit, and cut back the social entitlement programmes which threaten to engulf the federal budget.

America's chief central banker and most venerated financial sage issued his warning at an informal occasion which has nonetheless become a set piece of the financial calendar - the annual August symposium organised by the Federal Reserve Bank of Kansas City in the idyllic Rocky Mountain setting of Jackson Hole, Wyoming.

For journalists it is a chance to get to know the shapers of US monetary policy (though in his prepared opening remarks Mr Greenspan did not once refer to the current state of the economy or the Fed's interest rate policy).

For the assembled financial policy-makers and academics, the gathering offers the occasion to enjoy the breathtaking scenery and debate a great macro-economic issue of the age - on this occasion, the impending mass of retiring baby boomers whose social security and healthcare demands will, if nothing is done, prove impossible for the country to meet.

In the short term, the problem was one of foreign debt: "It is difficult to imagine that we can continue indefinitely to borrow from abroad at a rate equivalent to 5 per cent of US gross domestic product," Mr Greenspan said, referring to the budget and current account deficits running at record levels.

The fiscal 2004 budget deficit is forecast at $420bn, while the current account shortfall hit a record $144bn in the first quarter alone. With the cost of oil imports rising, the latter could swell further later this year, to be financed by foreign purchases of US government securities.

Yesterday brought fresh signs of trouble as the Commerce Department in Washington revised its estimate of second-quarter GDP growth to 2.8 per cent from the initial 3 per cent. By European standards at least, it is a respectable enough figure. But it is well below the 4.3 per cent achieved in the first quarter and further evidence that the economic recovery on which Mr Bush has pinned his hopes for re-election is losing steam.

One reason for the GDP downscaling was the surge in the June trade deficit to a record $55bn. Equally alarming was the puny 32,000 new jobs created by the economy in July. August's employment figures, due next Friday, are awaited with much anxiety at the White House.

Mr Greenspan confined himself to the issue at hand yesterday. His message was, as usual, couched in circumlocution: "If we have promised more than our economy has the ability to deliver to retirees without unduly diminishing real income gains of workers, as I fear we may have, we must recalibrate our public programmes so that pending retirees have time to readjust through other channels." The translation, however, is simple. By 2035, the number of Americans over 65 is likely to have doubled. If the gap between expectation and reality is to be bridged, two broad options existed. Either increase payroll taxes on current workers, or raise the retirement age and slow the growth of spending on Medicare, the federally funded healthcare programme for the elderly. The Fed chairman left no doubt he preferred the latter.

Behind the scenes, however, the main topic at Jackson Hole will be interest rates - and whether the Fed waited too long to begin the tightening process. Only in late June did the central bank raise its benchmark short-term rate from its 45-year low of 1 per cent, and a second 25-point increase on 10 August lifted it to 1.5 per cent.

Mr Greenspan had signalled the Fed intended to nudge the rate steadily higher throughout the rest of the year, on the way towards a "neutral" level of 3.5 per cent or so, where monetary policy is neither expansionary nor contractive. But, many economists warn, such belated plans may have been upset by the slowing economy.

Had the central bank pushed up rates more aggressively earlier, the then vigorous economy could easily have absorbed the impact. Now, with inflation stirring, Mr Greenspan may have to keep rates artificially low, to prevent slowdown turning into stall.