Strategy

Greenspan Sees Improving Trade Deficit

Market pressures ''appear poised to stabilize'' the current account deficit, but any decrease may need to wait for the longer term.
Lisa YoonFebruary 4, 2005

The growth in the U.S. trade deficit — “and its attendant financing requirement” — may soon begin to see improvement, according to the text of a speech delivered Friday by Federal Reserve chairman Alan Greenspan.

Addressing a business conference in London, Greenspan said that market pressures “appear poised to stabilize and over the longer run possibly to decrease the U.S. current account deficit.” The Fed chairman reprised his comments from earlier occasions when he expressed optimism that the deficit “cannot widen forever.” But he tempered that outlook by raising the possibility that “new twists and turns…will emerge in a seemingly ever-more-complex international economic and financial structure.”

The repercussions of actions by Asian central banks — which have been purchasing dollars to bolster their own currencies — are “difficult to pin down,” Greenspan stated. Another issue is the continuing rise of globalization, “arguably one of the key factors that has facilitated the financing of the U.S. current-account deficit,” but one that has resulted in an “international economic environment with little relevant historical precedent.”

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One fear of many economists is that some as-yet unknown event could trigger a foreign flight from dollar assets, leading to plummeting U.S. stock prices, soaring domestic interest rates, and reverberations that would be felt throughout the global economy.

Greenspan’s remarks, however, focused on encouraging signs such as benefits to U.S. companies of the decline in the dollar, “which bodes well for future U.S. exports and the adjustment process.” In general, he observed, “the voice of fiscal restraint, barely audible a year ago, has partially regained volume.”