Greenspan warns of trade deficit - East Valley Tribune: Business

Greenspan warns of trade deficit

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Posted: Saturday, November 20, 2004 6:15 am | Updated: 5:47 pm, Thu Oct 6, 2011.

WASHINGTON - Swollen trade deficits eventually could threaten the economy by souring foreign appetites to invest in the United States, Federal Reserve Chairman Alan Greenspan warned Friday. The dollar, already sliding, took another nosedive after his remarks.

Greenspan’s remarks, to a banking conference in Frankfurt, Germany, referred to the broadest measure of U.S. trade, the current account deficit. That swelled to a record $166.2 billion in the second quarter of this year.

This deficit is considered the best measure of a country’s international economic standing because it tracks not only goods and services but investment flows between countries as well. For all of 2003, the current account deficit mushroomed to an all-time high of more than $500 billion.

So far, foreigners are willing to lend the United States money to finance its current account imbalances, Greenspan said. The worry is that at some point foreigners might suddenly lose interest in holding dollar-denominated investments.

That could cause them to unload investments in U.S. stocks and bonds, which would send prices of the stocks and bonds plunging and interest rates soaring. Japan, followed by China and then Britain are the biggest holders of U.S. Treasury securities.

The sinking value of the U.S. dollar, which reflects in part investors’ fears about the big U.S. trade and budget deficits, has some private economists more worried 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. That, in turn, could elevate the cost of financing the deficit, he said. The U.S. dollar has been sagging against the euro, the currency used by France, Germany and 10 other European countries.

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