How fragile is America's economic recovery? So far, it is holding up pretty well. Investment seems to be reviving, taking up the lead, as the country's maxed-out consumers start to curb their spending. That is good. Growth is steady, employment high, and inflation (so far) surprisingly well suppressed. Yet financial markets are jittery, the budget deficit looks immovable, and the country's foreign borrowing is running at unprecedented levels. Ought one to be worried, or not?

The Federal Reserve Board seems unsure: It has been sending mixed messages. Chairman Alan Greenspan says that all is well so far as growth, inflation, and external borrowing are concerned. Then he furrows his brow and voices grave concern about the budget deficit.

That is an inconsistent position, on the face of it. If external borrowing—currently running at more than 6 percent of gross domestic product—is not a problem, then one wonders why the budget deficit should be. If the world is content to lend America colossal sums of money very cheaply, and to keep on doing so year after year, then the deficit is not an issue. Indeed, to the extent that it has been created by lower taxes (which Greenspan applauds—he wants President Bush's cuts to be made permanent), then an indefinitely financeable budget deficit and the foreign borrowing that goes with it are sensible policy. Tax cuts spur growth; and the global capital market has an insatiable appetite for American debt. Great: Lie back and enjoy it.

Unfortunately, Greenspan is right about the budget deficit. Why? Because he is wrong about the external deficit. His lack of concern about that is a big mistake. The present huge flow of lending from abroad is not guaranteed to last. If foreigners' appetite for American assets should diminish—and, sooner or later, it will—the result will be some combination of further downward pressure on the dollar (leading, in turn, to higher inflation) and higher interest rates (leading to slower growth).

Either of these outcomes, or some combination of the two, might be perfectly manageable if it happened gradually, but there is no assurance of that. Typically, in fact, such rebalancings happen abruptly, triggered by lurches in financial-market sentiment. That is why steps to curb the budget deficit would make the American economy, and the world economy, much safer.

To be sure, the Bush administration is right to call on Europe and Asia to change their own economic policies as well. They undoubtedly should.

A few years ago, the European Union's governments adopted what they called the "Lisbon agenda"—a program of supply-side economic reforms (with the emphasis on market deregulation of one kind or another) designed to spur growth. Virtually nothing has come of it. The big European economies are also struggling because of lack of domestic demand. This is partly a consequence of their adopting the single currency, which has made it impossible to get monetary policy right country by country: For the moment, the E.U. is too little integrated for one monetary policy to be right for every member. Germany, for instance, needs lower interest rates, but it cannot get them. Demand is weak, too, because fiscal policy cannot respond flexibly to these new conditions. That is another aspect of the way the Union's economic arrangements have been put together—another unforced error.

And it has consequences for the United States, because a misfiring European economy is not demanding enough imports from America. That worsens America's trade deficit and adds to the need for foreign borrowing. Asian economies, especially China, are making the problem worse as well—in their case, by resisting the upward appreciation of their currencies against the dollar that is the natural counterpart of their enormous trade surpluses with the United States. If their currencies strengthened against the dollar, American goods would be cheaper for Asians to buy. America's exports would rise, and that too would help stabilize the world economy.

Even though all of this is true, the fact remains that America's budget deficit is probably the single greatest destabilizer in the world economy at present. Reducing that deficit is America's responsibility—and America would be the principal beneficiary of doing so. Others' failures to do what is in their own interests, and in the broader global interest as well, is no excuse for the United States' leaving that problem unaddressed.

The administration would argue, of course, that it is working very hard to get the budget deficit down. Its aim, it says, is to halve the deficit by 2009, which sounds quite impressive. In fact, as Ed McKelvey of Goldman Sachs argues in a recent research note circulated by the bank, that is a pretty modest ambition. Halving the deficit by 2009 ought to be an easy thing to do—and one could well question whether that timetable reflects an adequate sense of urgency. But the real problem is that the administration's plans, as they stand at present, are extremely unlikely to achieve even that limited objective.

Halving the deficit by 2009 ought to be easy because the end of that fiscal year will mark the eighth anniversary of the present expansion, assuming that nothing happens in the meantime to interrupt it. Expansions this long almost never end with big budget deficits, because all those years of growth cause tax receipts to soar. (One recent exception is instructive: The deficit was so big in 1990, despite years of steady growth, that George H.W. Bush was obliged to break his "read my lips" promise and strike a deal with Congress that saw tax rates hiked.)

Aside from its being easy, by ordinary historical standards, to halve the deficit by 2009, this goal is modest in another way as well—it is modest relative to need. Around then, Social Security and Medicare spending will begin to surge as Baby Boomers start leaving the workforce in serious numbers. Prudent fiscal policy would plan to arrive at that point with the budget balanced, or with surpluses in hand.

So halving the deficit by 2009 gets zero marks for ambition or prudence. What's worse is that the administration has no plausible expectation of meeting even that goal. The logic, as McKelvey explains, is straightforward. The budget deficit—the excess of spending over revenue—is already so big that spending from now on must grow much more slowly than revenue if the gap is to shrink. Revenues are expected by most forecasters, official and unofficial, to grow by about 7 percent a year between now and 2009. That reflects an assumption, as seems appropriate for this administration, of no increase in tax rates. Do the arithmetic, and halving the deficit by 2009 therefore turns out to require growth in spending of between 4 percent and 5 percent a year.

A spending increase of around 8 percent is already in the works for fiscal 2005. That brings the growth required in future years down to between 3 percent and 4 percent—about half of what it was over the previous four years. If you then take mandatory programs and debt interest off the table, and if you also reckon that the administration drives through its plans for defense spending, the implication is that the spending that remains must actually shrink by more than 2 percent a year in inflation-adjusted terms. That would be difficult for any president to achieve. For a president with a proven record of fiscal indiscipline, who simply loves to spend public money, it is hard to imagine.

Which suggests that, other things being equal, the budget deficit will persist at about its present level, despite the economy's running at close to full capacity, and will still be there when the demographic pressures really start to grow at the start of the next decade. America's daunting requirement for external financing will get no relief from fiscal policy. Foreign investors' appetite for American assets will have to continue unabated. But this is an implausible scenario. Private investors have already turned away: Foreign central banks are already America's principal creditors. There must be a limit to the amount of dollar reserves that China and the others think it makes sense to accumulate. As that limit approaches—probably long before—a possibly violent adjustment in both the dollar and American interest rates is a real danger.

What is the answer? For these purposes, forget Social Security reform. That is a good idea, in my view, on its merits, but it will do nothing to curb the deficit over the relevant timescale—if anything, it will make things worse. The president must either discover in himself an entirely new zeal to cut spending; or else, like his father, come around to the need for higher taxes; or both. The main question is whether this looming rethink happens calmly, while he can still choose to act, or under pressure, with no pretense of remaining in control of events.