MEXICO CITY, Nov 14: The United States is having little trouble funding its big current account gap, but foreign investors will eventually “balk” at lending the money to cover it, Federal Reserve Chairman Alan Greenspan said on Monday.
Greenspan said the United States needed to keep its economy flexible to withstand the inevitable waning in overseas demand for dollar assets, which could raise US interest rates.
“To date, despite a current account deficit exceeding 6 per cent of our gross domestic product, we — or more exactly the economic entities that comprise the US 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 from Washington to a Banco de Mexico conference in Mexico City.
“Of course, deficits that cumulate to ever-increasing net external debt, with its attendant rise in servicing costs, cannot persist indefinitely,” he added. “At some point investors will balk at further financing.”
The current account is a nation’s broadest measure of international trade — and the persistent and growing US shortfall shows the nation consuming more than it produces, and borrowing abroad to cover the difference.
Greenspan said foreign investors eventually would decide they no longer wanted to increase the proportion of their portfolios held in dollars. He said this “concentration” risk limits how far the current account gap could widen.
Indeed, he said some signs already pointed to a dwindling overseas appetite for the US dollar. But the Fed chief, who is due to step down from the helm of the central bank in January 2006, put no time line on when he thought financing the trade shortfall would become problematic.
“Concentration and other risks in holding dollar balances seem to have become a consideration at least for some investors,” Greenspan said, citing data from the Bank for International Settlements that suggested the dollar craving among private investors had eased in recent years.
Greenspan cast doubt on the ability of policy-makers to shift global trade patterns, saying a nation’s current account balance was really a matter for markets.
“Being able to rely on markets to do the heavy lifting of adjustment is an exceptionally valuable policy asset,” he said.
While raising US interest rates would likely elevate US household savings, it would also attract a larger flow of foreign capital, blunting the effect on the current account gap, Greenspan said.
And while reducing the US budget gap could help cut the current account shortfall, he said it would do so “to an uncertain and possibly small extent.”
The Fed chief said economic flexibility would help the United States should the dollar ever lose its vaunted status as the preferred reserve currency of foreign powers.
But Greenspan added he did not think that the dollar would lose its dominant place on the global stage “any time soon.”—Reuters
