(FORTUNE Magazine) – The federal government is underwater. And we mean deep underwater. The deficit, which last year hit $374 billion, is expected to reach an astonishing $500 billion this year--just four years after we were mulling what to do with a gigantic surplus. Bill Gross, the bond-market guru and a longtime Republican supporter, has been saying he's so disgusted with rising budget deficits that for the first time in his life he may vote Democrat. Even the normally staid IMF recently launched a stinging criticism, warning that our deficit threatens global stability. Yet among the economists, market watchers, and business and political leaders whose concerns are getting louder, one voice is conspicuously, mysteriously, absent: that of the man who led the crusade against rising deficits the last time around--Alan Greenspan.

The Fed chairman hasn't been totally close-mouthed on the subject. References to his past concerns about the deficit have leaked out through Paul O'Neill's recent tell-all book. And Greenspan did mention the deficit last summer when questioned before Congress. But he hasn't been making headlines--only very close watchers would have noticed his remarks. So what's really going on? Has the nation's economic sage decided deficits aren't so bad after all? Or in this election year is Greenspan playing politics?

As with all things Greenspan, the answer lies in nuance. Back in 1987, when nobody could imagine a world without deficits, Greenspan issued a provocative challenge to the Reagan administration, asking whether our long-term interests might not best be served by surpluses. The following year he spoke bluntly: "If we do not act promptly, the imbalances in the economy are such that the effects of the deficit will be increasingly felt and with some immediacy." Back then Greenspan dismissed as "fanciful" the idea that concerns over the deficit were overblown.

It was a long, hard fight--one that few people, even Greenspan, expected to win. And tough decisions with real political consequences were made, such as the first President Bush's break with his election promise of no new taxes and President Clinton's decision to raise taxes and cap spending, enraging his supporters. When surpluses finally did materialize in the late 1990s, deficit fighters were extremely reluctant to give away the gains. When Greenspan endorsed President Bush's ambitious tax cuts in 2001 it raised eyebrows; when the Maestro supported the second round of tax cuts in 2003, it looked as if he was giving his stamp of approval to the White House. Now, without powerful opposition, Bush has downplayed the deficit and continued to propose new spending. (Mars, anyone?)

But Greenspan is finally ready to take a stand. Fed insiders say he's gearing up to deliver a tough message on the deficit; they suggest the chairman actually prepared a speech some weeks ago and is looking for the right opportunity to deliver it. He may get his chance early next month when he gives his semiannual testimony on monetary policy to Congress. Intimates say when Greenspan talks privately about the deficit he uses terms like "awful" and "quite frankly dangerous."

So what might he say publicly? Even though estimates for the current year put the deficit as high as $500 billion, Greenspan believes one-time costs for homeland security and military spending will come down. In fact, he thinks the deficit may come in lower than projected for this year and next. But after 2005, insiders say, Greenspan fears deficits will begin to climb again, and as the baby-boomers retire in droves, that will put the nation's finances under enormous pressure.

This is a message that neither the Republicans nor the Democrats will like. When Greenspan speaks he'll be saying that deficits do matter to the economy--something the administration doesn't want to hear. At the same time, he'll suggest his favorite remedy--spending cuts. That's a policy prescription Democrats will find unpalatable. He could also indicate concern about Medicare spending, an area that neither party wants to touch.

One likely reason Greenspan held his tongue so long was the fragile state of the economy. Until very recently growth was stubbornly subdued, and the Fed's No. 1 worry was deflation. It seemed appropriate for the administration to inject more money into the economy. But now that the economy is improving, it's time to ease off the accelerator. Another possible reason: Greenspan doesn't want to spook the bond market, which is sanguine about the deficit so far because of the lack of inflation (a very different scene from the late 1980s). It's one thing for markets to see the Fed chairman fixing problems; it's quite another for him to set off a reaction. Greenspan knows that better than anyone. So whenever his message is delivered, expect him to tread carefully.