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 Chairman Alan Greenspan 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
dollar? Regrettably, no answer to those questions is
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. Although he said that forecasting
exchange rates "has a success rate no better than that of
forecasting the outcome of a coin toss."
In his speech, Greenspan also didn't discuss 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 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, 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 flexibility in the U.S. economy also has been
important in the economy's ability to absorb and rebound
from economic shocks, he said.
of the two parties have been willing to face. In fact the current
administration, just re-elected for another 4 years strongly
endorses the underlying policies that have accelerated the "bloated"
trade deficit.
What
good will that do when the products and services are produced in a
foreign country? Take TV's for example. If every country in the
world suddenly removed every last trade barrier on TV's - how would
it benefit Americans? There are not any made in our country today!
The production of an American invention has been exported to foreign
countries.