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Greenspan Warns About Trade Deficit Impact
21 minutes ago Business - AP
By JEANNINE AVERSA, Associated Press Writer
WASHINGTON - The persistence of bloated U.S. trade deficits over time can pose a risk to the U.S. economy, which thus far has proven resilient, Federal Reserve (news - web sites) Chairman Alan Greenspan (news - web sites) warned Friday. Policy-makers must not get lulled into a sense of complacency, he said.
The broadest measure of trade, called the current account deficit, swelled to an all-time high of $166.2 billion in the second quarter of this year, the most recent period for which this information is available.
"Current account imbalances, per se, need not be a problem, but cumulative deficits ... raise more complex issues," Greenspan said in speech in Frankfurt, Germany. A copy of his remarks was distributed in Washington.
So far, foreigners are willing to lend the United States money to finance the current account imbalances, Greenspan pointed out. The worry, however, is that at some point foreigners might suddenly lose interest in holding dollar-denominated investments. That could cause foreigners to unload investments in U.S. stocks and bonds, sending their prices plunging and interest rates soaring.
The sliding value of the U.S. dollar has made some private economists more concerned about this potential risk.
"It seems persuasive that, given the size of the U.S. current account deficit, a diminished appetite for adding to dollar balances must occur at some point," Greenspan said. "But when, through what channels and from what level of the dollars? Regrettably, no answer to those questions in convincing," he said.
The U.S. dollar has been persistently weak against the euro ? the currency used by 12 European countries. The dollar had dropped to a new record low against the euro on Thursday before bouncing back.
The dollar's slide has been good for U.S. manufacturers because it makes their goods less expensive in foreign markets. But the corresponding rise of the euro makes European goods more expensive in foreign markets.
Greenspan, in his speech, did not specifically discuss the value of the dollar or the future course of interest rate policy in the United States.
Wanting to keep inflation from becoming a danger to the economy, Fed policy-makers last week boosted short-term interest rates for a fourth time this year. The action left a key rate, called the federal funds rate, at 2 percent. The funds rate is the Fed primary tool for influencing economic activity.
With recent signs that inflation is heating up again after a long cool spell, economists believe the chances are increasing that the Fed will raise rates again at its last meeting of the year on Dec. 14.
President Bush (news - web sites) says the best ways to handle the yawning trade deficits is to get other countries to remove trading barriers and open their markets to U.S. companies. Democrats, including John Kerry (news - web sites), Bush's former rival for the presidency, have blamed Bush's free-trade policies for the loss of U.S. jobs.
Greenspan said that although there's been evidence that "among developed countries, current account deficits, even large ones, have been diffused without significant consequences, we cannot become complacent."
Reducing the U.S. federal budget deficit, Greenspan said, would be an important action to boost U.S. savings. Continued flexiblity in the U.S. economy also has been important in the economy's ability to absorb and rebound from economic shocks, he said.
Deficits...deficits...deficits....*sigh*
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Greenspan: Appetite for Dollar to Dwindle
1 hour, 58 minutes ago Business - Reuters
WASHINGTON (Reuters) - The insatiable foreign demand for dollar holdings would eventually fall as investors diversify, U.S. Federal Reserve (news - web sites) Chairman Alan Greenspan (news - web sites) said on Friday in remarks that landed hard on the dollar.
Greenspan told a banking conference in Frankfurt the United States should cut its record budget gap to help narrow the shortfall in its current account and avoid a need to offer higher rates of return to retain foreign investment and painful economic consequences.
"Current account deficits, even large ones, have been defused without significant consequences, (but) we cannot become complacent," Greenspan warned in a prepared text of his remarks, which was made available in Washington.
He was speaking ahead of weekend meetings in Berlin of the Group of 20 wealthy and developing economies, at which the tumbling dollar will likely be a topic for discussion.
Greenspan said cutting the U.S. budget gap would be the best way to boost domestic saving and lessen America's reliance on foreigners to fund the huge shortfall in the current account, a broad trade measure that includes investment flows.
"Alternative approaches to reducing our current account imbalance by reducing domestic investment or inducing recession to suppress consumption obviously are not constructive long-term proposals," he said.
The Fed chief said an eventual desire by foreign investors to cut the risk of holding too many dollars may lead them away from U.S. assets or lead them to seek higher rates of return.
He warned this would elevate the cost of financing of the U.S. current account deficit and render it "increasingly less tenable."
"We see only limited indications that the large U.S. current account deficit is meeting financing resistance," Greenspan said. "Yet, net claims against residents of the United States cannot continue to increase forever in international portfolios at their recent pace."
"It seems persuasive that, given the size of the U.S. current account deficit, a diminished appetite for adding to dollar balances must occur at some point," Greenspan said.
The dollar hit a new four-year low against the Japanese yen after his comments and fell against the euro, pushing the European currency back toward recent record highs.
"What jumps out is (Greenspan) spending so much time talking about U.S. net foreign debt. It seems like he has pooh-poohed that issue more in the past and is a bit more preoccupied with it now," said Greg Anderson, senior foreign exchange strategist with ABN Amro bank in Chicago.
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