ALAN GREENSPAN: 'We Are Running Out Of Buffer In The Economy'

The U.S. lacks the resources to adequately respond to external shocks like a foreign relations crisis or climate change, former Federal Reserve Chair Alan Greenspan said Wednesday.

In an appearance on "In The Loop With Betty Liu," Greenspan warned that the economy has almost no room to maneuver if faced with a security threat:

We are running out of buffer in the economy. We don't have the capability should, for example, we run into a major conflict in the Middle East or elsewhere where it requires a major increase in our defense budget. Our defense budget is heading in a direction where in a couple, two or three years it will be at the lowest level relative to GDP since before World War II. We don't have the physical resources to respond.

Meanwhile, the government is going to have difficulty raising revenues to adequately confront longer-term threats like global warming:

We're seeing innumerable things going on in our climate which is going to require funding in order to get to, I wouldn't say cure, but to offset. And we have no - we don't have those monies. We're already fully committed in the budget. We have no way of finding new revenues. And one thing that what concerns me is that if in the context we're going to be getting and inflating a, I should say, pressure in the fiscal system at the same time we're doing major things in the monetary system.

For context, here's the chart of year-on-year percent growth in current tax receipts. They've been declining since mid-2010.

Finally, Greenspan believes a correction is likely given current valuations, but it's impossible to say when it will hit.

...the stock market has recovered so sharply for so long you have to assume somewhere along the line we're going to get a significant correction. Where that is I do not know, but I would not say that we are grossly overpriced at this point in a historical context.

Greenspan also discussed the resilience of the U.S. dollar and how there's no way of telling what the outcome of the Fed's unprecedented easing will be.