New York, NY, March 11--Fed Chairman Alan Greenspan told the Council on Foreign Relations here Thursday that he was not "overly" concerned about the record U.S. trade gap and heavy consumer debt loads, but the nation's budget outlook gave him pause.
Said Greenspan, "The resolution of our current account deficit and household debt burdens does not strike me as overly worrisome, but that is certainly not the case for our fiscal deficit."
"Our fiscal prospects are, in my judgment, a significant obstacle to long-term stability because the budget deficit is not readily subject to correction by market forces that stabilize other imbalances," he said.
The Fed chief said rapid globalization may have allowed the United States to carry large trade and budget gaps so far without economic harm.
"Has something fundamental happened to the U.S. economy that enables us to disregard all the time-tested criteria for assessing when economic imbalances become worrisome?" Greenspan asked rhetorically. "Regrettably, the answer is no; the free lunch has still to be invented."
"We do however, seem to be undergoing what is likely, in the end, to be a one-time shift in the degree of globalization and innovation that has temporarily altered the specific calibrations of those criteria," he said.
Foreign investors are effectively funding record shortfalls in the U.S. budget and current account, the broadest measure of the nation's trade, and some economists fear an abrupt reversal in investor confidence could hit the American economy hard.
When exchange rate swings are taken into account, Greenspan said, global investors so far have only modestly shifted away from dollar assets. He did repeat, however, that foreign investors may at some point decide they are holding too many dollar-denominated assets.
He also reiterated that if the dollar were to drop further, foreign exporters could decide to no longer absorb the impact by accepting smaller profits. In that case, he said U.S. import prices would rise and the trade gap would narrow.
Greenspan credited increasingly open global trade with lowering inflation and stabilizing economies, and said it could rebalance global trade without a crisis.
"Should globalization continue unfettered and thereby create an ever-more flexible international financial system, history suggests that current account imbalances will be defused with modest risk of disruption," he said. "The greater the degree of ... flexibility, the less the risk of a crisis."
Taking audience questions after his wide-ranging address, Greenspan said purchases of U.S. government bonds by foreign central banks trying to keep their currencies down against the dollar had only a small impact on U.S. interest rates.
"As best we can figure out ... it's really modest," he said. "We're talking about something in the area of 50 basis points -- sometimes less, maybe sometimes more."
In his speech, Greenspan downplayed concerns that the high debt loads and low savings of U.S. consumers carried the seeds of a future economic downturn.
He said a "significant" part of the recent rise in debt loads relative to income reflected a rise in homeownership -- and a resulting climb in debt for former renters.
"Households ... do not appear to be faced with significant financial strain," he concluded, adding that households would be buffered even if interest rates rose "materially" because the bulk of their debts carried fixed interest rates.
Greenspan said it was possible home prices in some areas of the country were too lofty but said a sharp fall in nationwide home prices "does not seem the most probable outcome."
But he noted rising investment in homes by speculators and said: "House prices ... like those of many other assets, are difficult to predict, and movements in those prices can be of macroeconomic significance."
