Greenspan Warns Anew on Trade Deficit

The AP reports:

Foreign investors will likely tire of bankrolling the bloated U.S. trade deficit but the economy's flexibility should help temper any fallout, Federal Reserve Chairman Alan Greenspan said Monday.

Greenspan's remarks delivered via video link to a conference in Mexico referred to the broadest measure of U.S. trade called the current account deficit, which swelled to a record $668 billion last year. The shortfall is financed mostly by foreign investors.

The huge current account deficits the U.S. has been running up each year "cannot persist indefinitely" Greenspan warned in prepared remarks. "At some point, investors will balk at further financing," he said. The Fed chief didn't say when this might occur.

This current account 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.

The current account deficit accounts for more than 6 percent of the total U.S. economic output as measured by gross domestic product.

Greenspan suggested that constraints on financing of the U.S. trade deficit are likely to come from "foreign investors' fears" of holding too large a share of their investment portfolios in U.S. stocks and bonds.

He suggested that this change could already be under way. He noted that of the more than $30 trillion in foreign investment tracked by the Bank for International Settlements in the first three months of 42.5 percent were in dollars and 39.3 percent were in euros.

If the dollar lost its' reserve currency status it would mean interest rates would have to be higher holding other variables equal.