Late Thursday, the House followed the Senate's lead and approved raising the federal debt limit by $800 billion, to $8.18 trillion. To date, the Bush administration has pushed the debt limit by $2.23 trillion since it came into office, and analysts said that the increase in the rise in borrowing limit by the federal government over the past three years is nearly two-and-a-half times the entire federal debt accumulated between 1776 and 1980.
There had been hopes among many economists that some legislators would push to impose a restriction on tax cuts as well as spending as the government warned that is was on the verge of defaulting on its debts.
The White House, meanwhile, said that President Bush will be signing the bill into law Monday, once he returns from Chile after a weekend summit meeting of members of the Asia-Pacific Economic Cooperation forum.
In a speech to at a banking conference hosted by the European Central Bank in Frankfurt Friday, Greenspan said that it would actually be preferable to move the federal budget deficit to a surplus; a policy that was a priority under Democratic President Clinton's watch which had inherited the deficit accumulated by the earlier Republican administration.
The bulk of the Fed's chairman's speech, however, focused on the government's other deficit, namely the current account deficit.
Some analysts argue that unlike the budget, the government has no direct control of trade flows and the resulting current account. Moreover, while the current account deficit has surged to an all-time high of $166.2 billion in the second quarter of this year, senior government officials have argued that the ballooning figure is a result of the attractiveness of U.S. assets to foreigners and a sign of U.S. economic strength more than anything else.
Greenspan agreed with that interpretation, but only up to a point.
"Current account imbalances, per se, need not be a problem, but cumulative deficits, which result in a marked decline of a country's net international investment position -- as is occurring in the United States -- raise more complex issues," Greenspan warned.
"The question now confronting us is how large a current account deficit in the United States can be financed before resistance to acquiring new claims against U.S. residents leads to adjustment...net claims against residents of the United States cannot continue to increase forever in international portfolios at their recent pace," he added.
Unlike cabinet members such as Treasury Secretary John Snow, the head of the central bank is independent of the White House and the Fed is expected to set monetary policy independent of political pressures. But while Greenspan has served under both Democratic and Republican administrations, it has nonetheless been clear that he is a staunch Republican himself. Yet, the Fed chairman has made clear that the twin deficits that keep growing ever larger under President Bush are not sustainable.
Moreover, even Treasury's Snow said earlier this week, after Bush's re-election was secure, that one of the administration's top priorities would be to reduce the trade deficit. But some fear that the administration is acknowledging the writing on the wall too late, and investors have certainly started voting with their feet since a second term for Bush was confirmed earlier this month by selling off U.S. dollars and buying euros and Japanese yen instead.
