Greenspan critical of trade deficits

Published 9:00 pm Friday, November 19, 2004

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 nose dive after his remarks.

Greenspan’s comments 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, the most recent figure available.

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. For 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 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 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 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.

On Wall Street, Greenspan’s warning sent stocks down. The Dow Jones industrials were off more than 100 points in afternoon trading.

The U.S. dollar has been sagging against the euro. After Greenspan’s remarks, which spurred traders to dump more dollars, the dollar fell again, flirting with a record low against the euro. The value of the greenback dropped to a 41/2 -year low against Japan’s yen.

The dollar’s slide has been good for U.S. manufacturers because it makes their products less expensive in foreign markets. That can help U.S. exports and narrow the trade gap.