Greenspan Warns About Trade Deficit Impact

The persistence of bloated U.S. trade deficits over time can pose a risk to the U.S. economy, which thus far has proven resilient, Federal Reserve Chairman Alan Greenspan warned Friday. Policy-makers must not get lulled into a sense of complacency, he said.
“Current account imbalances, per se, need not be a problem, but cumulative deficits … raise more complex issues,” Greenspan said in speech in Frankfurt, Germany. A copy of his remarks was distributed in Washington.

So far, foreigners are willing to lend the United States money to finance the current account imbalances, Greenspan pointed out. The worry, however, is that at some point foreigners might suddenly lose interest in holding dollar-denominated investments. That could cause foreigners to unload investments in U.S. stocks and bonds, sending their prices plunging and interest rates soaring.

The sliding value of the U.S. dollar has made some private economists more concerned about this potential risk.

Yahoo