gst, do you have a private hot line into AG, or what? See this:
Friday July 30, 3:45 pm Eastern Time
ANALYSIS-Leveraged U.S. economy in focus again
By Marjorie Olster
NEW YORK, July 30 (Reuters) - A Federal Reserve warning and the dollar's recent drop have refocused attention on the
sobering fact that the highly leveraged U.S. economy will not be able to count on foreign investors to bail it out forever.
Fed chairman Alan Greenspan told U.S. lawmakers this week that the mounting sums of U.S. debt held by foreigners will
eventually come due and could push market interest rates up at a time when the dollar is falling.
Although the influential Fed chief reassured markets that day of reckoning was far off, some Wall Street analysts say the dollar's sharp decline against other
major currencies recently may be a sign that it is coming sooner than the Fed thinks.
''Greenspan is saying we are living beyond our means, we are not generating enough savings. In effect he is saying 'Don't count on being able to attract foreign
investors without someday being forced to pay','' said Fed watcher David Jones, chief economist at Aubrey G. Lanston & Co.
''He was suggesting it was supposed to come in the distant future, but it is starting now,'' Jones added.
Greenspan discussed the issue this week and last in both legs of his Humphrey-Hawkins testimony to Congressional committees, identifying it as one of the
troubling imbalances that could derail the eight-year-old U.S. expansion.
''As international indebtedness mounts...and foreign economies revive, capital inflows from abroad that enable domestic investment to exceed domestic savings
may be difficult to sustain,'' the Fed chairman said.
''Any resulting decline in demand for dollar assets could well be associated with higher market interest rates, unless domestic saving rebounds,'' he cautioned.
According to U.S. Treasury statistics, foreigners owned about 38 percent of the $3.3 trillion of privately-held U.S. government securities outstanding as of the
first quarter of this year. In 1994, foreigners owned only about 21 percent of privately held U.S. government debt.
Those accounts do not include foreign central bank holdings of U.S. Treasuries.
If foreigners' inclination to hold dollar assets wanes, Greenspan warned, market interest rates will rise and rate-sensitive areas of the economy could come under
pressure and consequently slow growth.
If the dollar is weakening at the same time, it creates potential for imported inflation, analysts said.
In the past two weeks the dollar has fallen about five percent against the Japanese yen and the euro.
The greenback was slammed by a shift in perceptions about growth in the U.S. and abroad. While there are indications that economic recovery in Japan and
Germany may be stronger than expected, the U.S. economy appears to be slowing.
Just as the sell-off was getting underway, the U.S. Commerce Department reported last Tuesday that the May international trade deficit hit a record $21.34
billion.
David Gilmore, a partner at Foreign Exchange Analytics, said the dollar would normally be buoyed by the recent rise in U.S. interest rates but the sell-off may be
a sign of concern about U.S. indebtedness.
''Perhaps the way the market is responding to the prospect of higher U.S. interest rates is a sign of how over-leveraged and invested foreigners are,'' Gilmore
said. ''Higher rates would normally attract capital.''
Alan Ruskin, research director at 4Cast Inc, said the markets see the gap between U.S. and European growth closing.
''That might keep European capital, which has been key in financing the current account deficit, at home,'' he added.
The U.S. current account deficit, the broadest measure of trade with the rest of the world, widened by 11 percent in the first quarter to a record $68.58 billion.
Europeans, faced with weak growth at home and interest rate differentials that favor the U.S., have been all too willing to aggressively export capital, Ruskin
said.
They have been big purchasers of U.S. corporate bonds, issuers of dollar-denominated bonds, buyers of U.S. equities and Treasuries. There has also been
healthy foreign direct investment in the U.S. by Europeans.
''In a sense, the U.S. has played the role of importer of last resort in the global economy while Europeans have been capital exporters of last resort, allowing the
U.S. to run a current account deficit without the dollar falling,'' Ruskin said.
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