US can still fund trade gap: Greenspan
Mon Nov 14, 2005 11:47 AM ET
By Greg Brosnan
MEXICO CITY (Reuters) - The recent dollar rise is a sign the U.S. economy is facing few problems funding its big current account gap, but the shortfall cannot expand forever, Federal Reserve Chairman Alan Greenspan said on Monday.
"To date, despite a current account deficit exceeding 6 percent of our gross domestic product, we -- or more exactly the economic entities that comprise the U.S. economy -- are experiencing few difficulties in attracting the foreign saving required to finance it, as evidenced by the recent upward pressure on the dollar," he said via video hookup to a Banco de Mexico conference in Mexico City.
Greenspan said a nation's current account surplus is really a market phenomenon not easily fixed by policy steps.
"Being able to rely on markets to do the heavy lifting of adjustment is an exceptionally valuable policy asset," he said.
Policy initiatives that raised interest rates would likely elevate U.S. domestic savings, Greenspan said, but they would also attract a larger flow of foreign investment, blunting the effect on the current account gap.
The Fed chief, who has warned of the dangers of government deficits in the face of an aging population, said reducing the U.S. budget gap could help cut the shortfall in the current account, though "to an uncertain and possibly small extent."
The current account, the broadest measure of U.S. trade with the rest of the world since it includes investment flows, ran at 6.3 percent of gross domestic product in the second quarter of the year.
While financial markets were not reacting as some had feared to the mounting current account gap, foreign investors would not be willing to fund the deficit indefinitely, particularly as the proportion of dollar assets rises in their portfolios, he said.
"At some point, investors will balk at further financing."
Greenspan said the best way for the United States to ensure it weathers global readjustments unscathed is to maintain and promote economic flexibility, including in the labor market.
The Fed chief said economic flexibility would help the United States should the dollar lose its vaunted status as the preferred reserve currency of foreign powers -- a phenomenon that would likely push up interest rates.
But Greenspan added he didn't think that the dollar would lose its dominant place on the global stage "anytime soon." |
