Posted: 2/4/2005 5:22:57 AM EDT
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Greenspan Says `Market Pressures' May Cut Current Account Gap Feb. 4 (Bloomberg) -- The dollar's decline and fiscal restraint by the U.S. government may soon begin to reduce the U.S. current account deficit, which stood at a record in the third quarter, Federal Reserve Chairman Alan Greenspan said. ``We may be approaching a point, if we are not already there, at which exporters to the United States, should the dollar decline further, would no longer choose to absorb a further reduction in profit margins,'' Greenspan said in the text of his prepared remarks to the Advancing Enterprise 2005 conference in London. ``Besides market pressures, which appear poised to stabilize and over the longer run possibly to decrease the U.S. current account deficit and its attendant financing requirements, some forces in the domestic U.S. economy seem about to head in the same direction,'' he said. One of those forces is increased pressure to cut the U.S. federal budget deficit, which would lower pressure to borrow from abroad, he said. ``The voice of fiscal restraint, barely audible a year ago, has at least partially regained volume.'' Greenspan's remarks are in keeping with his comments on March 4 and Nov. 19, 2004, in which he argued that financial markets would bear the brunt of a an adjustment in the current account, the widest measure of trade in goods, services and financial transfers. The current account deficit widened another $17.5 billion to a record $164.7 billion in the third quarter of last year from $147.16 billion in the first quarter. The dollar has fallen 4.25 percent since March against a basket of currencies of major trading partners. ``From early 2002 to early 2004, the dollar's exchange rate against the euro and sterling, on average, declined about 30 percent, yet dollar prices of imported manufactured goods from the European Union rose only 9 percent, slight more than dollar prices of U.S. manufactured goods during the same two years,'' Greenspan said. Rather than raising prices, producers abroad absorbed exchange rate losses, he said. Greenspan said U.S. consumption, financed in part by mortgage financing, faster growth in the U.S. versus trading partners, and the willingness of exporters to the U.S. to accept lower margins to preserve market share have ``offset'' the effects of the dollar's decline. `Interestingly, the change in U.S. home mortgage debt over the past half-century correlates significantly with our current account deficit,'' he said. Consumers in the countries of U.S. trading partners don't readily available mortgage financing ``to finance consumption expenditures,'' he added. The forces leading the U.S. current account deficit to expand are changing, he suggested. While foreign companies may have hedged their exposure to the falling dollar, many of those contracts likely will expire, he said. And now, although slowly, ``the lower dollar has undoubtedly boosted the competitiveness of U.S. exports and the profitability of U.S. exporters,'' Greenspan said. ``Given the dollar's depreciation since 2002, U.S. exporters' profit margins appear to be increasing, which bodes well for future U.S. exports and the adjustment process.'' Greenspan and some of his Fed colleagues, such as governor Edward Gramlich, have suggested that a widening in the current account deficit from current levels is not sustainable over the long term. Gramlich said the U.S. is in a co-dependency with Asia providing its own savings to substitute for a lack of savings in the U.S. in exchange for consumption of imports here. Asian governments have been buying dollars to support their own currencies, Greenspan said. ``Such intervention may be supporting the dollar and U.S. Treasury bond prices somewhat, but the effect is difficult to pin down.'' Last year, Greenspan also called on reduction in federal spending as a way of slowing demand and growth in the trade deficit. He hasn't called for increases in taxes, which would also lower demand. Greenspan said the ``change in U.S. home mortgage debt over the past half-century correlates significantly with our current account deficit.'' Greenspan on Bloomberg |
