Globalization and trade deficit are connected says Greenspan

November 15, 2005

"The rise of our deficit and our ability to finance it appears to coincide with a pronounced new phase of globalization that has emerged in the past decade," the U.S. Federal Reserve Chairman Alan Greenspan said in a speech delivered today to the Banco de México. "This phase is characterized by a major acceleration in U.S. productivity growth and the decline in what economists call home bias, the parochial tendency to invest domestic savings in one's home country."'' "To date, despite a current account deficit exceeding 6 percent of our gross domestic product, we -- or more exactly the economic entities that comprise the U.S. economy -- are experiencing few difficulties in attracting the foreign saving required to finance it, as evidenced by the recent upward pressure on the dollar," he said.

"Of course, deficits that cumulate to ever-increasing net external debt, with its attendant rise in servicing costs, cannot persist indefinitely," he added. "At some point investors will balk at further financing."

"A nation's current account balance thus is essentially a market phenomenon that is not readily subject to rebalance by targeting one or more policy variables such as the exchange rate," Greenspan said. In the speech Greenspan said interest rate increases nor cuts in the US fiscal deficit would result in large reductions in the current account deficit. These are the three standard ways the government controls the economy.

The deficit last year widened to $665.9 billion from $530.7 billion. It totaled $195.7 billion in the second quarter, or 6.3 percent of gross domestic product.

Greenspan did say he did not think that the dollar would lose its dominant position in the global economy “any time soon” and that economic flexibility would help the United States should the dollar lose its status.