Greenspan issues new warning over US current account deficit

US Federal Reserve chairman Alan Greenspan warned Friday of the danger that foreign investors may become fed up with financing the United States’ huge current account deficit. Greenspan said in a speech to the European Banking Congress in Frankfurt that the deficit cannot be indefinitely supported by money from abroad.

The US current account deficit reached a record 166.2 billion dollars in the second quarter. Japan and China have been major buyers of US debt in recent years.

Economists worry that foreigners could suddenly lose their appetite for dollar-denominated investments and unload investments in US shares and bonds. That would hit stock market confidence and send interest rates soaring.

The Declining Dollar

The underlying problem is that deficits in America’s global transactions are at record levels, putting Americans at risk of either a slow deterioration in living standards or abrupt spikes in inflation and interest rates.

The dollar, which has declined nearly 30 percent against the euro since President George W. Bush took office in 2001, fell to a record low this week. The decline has not been as marked against other currencies, largely because China and Japan prop up the dollar by investing heavily in U.S. Treasury securities.

The Dollar Deluge

U.S. officials are exhorting the world to work in unison to achieve a more balanced and robust global economy. Snow’s plan, as outlined to an audience at London’s Royal Institute of International Affairs last Wednesday:

1) increase savings in the United States so it can reduce its foreign borrowing;
2) expand growth in Europe and Asia, so that these regions can import more from America and take pressure off U.S. trade deficits; and
3) ensure that Asian countries such as China, Japan and South Korea do not hold their currencies artificially low by selling them in massive amounts to purchase dollars.

Were Asian governments to allow their currencies to float upward, Snow’s reasoning goes, the dollar would become weaker against them and stimulate more American exports. “The [U.S.] current account is a shared responsibility,” Snow said. Translation: the U.S. wants others to clean up the mess it has made.