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The Greenspan Guide to Managing the U.S. Current Account Deficit

Why isn’t Alan Greenspan worried about the U.S. current account?

December 16, 2003

Why isn't Alan Greenspan worried about the U.S. current account?

Few issues are of more concern to economists and politicians around the world than the sustainability of the U.S. current account deficit and its effects on the global economy. Federal Reserve Chairman Alan Greenspan does not share their grave worries. In our Read My Lips feature he explains why.

What is the key issue in the debate over the U.S. current account deficit?

"Can market forces incrementally defuse a worrisome build-up in a nation's current account deficit and net external debt — before a crisis more abruptly does so?"

Is there a historical precedent for this?

"Early post-World War II Britain was hobbled with periodic sterling crises."

How does the United States' current situation compare with Britain's after World War II?

"The experience of Britain's then-extensively regulated economy — harboring many wartime controls well beyond the end of hostilities — provides testimony to the costs of structural rigidity in times of crisis."

Do you believe that the growing size of the U.S. current account deficit is dangerous?

"There is, for the moment, little evidence of stress in funding U.S. current account deficits."

Why has it been so easy for the United States to run up such a large deficit?

"The United States has been rare in its ability to finance its external deficit in a reserve currency."

What could cause this funding to dry up?

"The foreign accumulation of U.S. assets would likely slow if dollar assets — irrespective of their competitive return — came to occupy too large a share of the world's portfolio of store of value assets."

What influence do foreigners have on the appetite for more debt?

"It will likely be the reluctance of foreign country residents to accumulate additional debt and equity claims against U.S. residents that will serve as the restraint on the size of tolerable U.S. imbalances in the global arena."

Why do you believe that this will occur?

"How much further can international financial intermediation stretch the capacity of world finance to move national savings across borders?"

How does the stock market crash of 2000 factor into all this?

"The apparent ability of our economy to withstand a number of severe shocks since mid-2000, with only a small decline in real GDP, attests to the marked increase in our economy's flexibility over the past quarter century."

Do you believe the U.S. current account deficit can be righted without drastic measures?

"Spreading globalization has fostered a degree of international flexibility that has raised the probability of a benign resolution to the U.S. current account balance."

Why not use protectionist measures to correct the U.S. current account deficit?

"The costs of any new protectionist initiatives — in the context of wide current account imbalances — could significantly erode the flexibility of the global economy. Consequently, it is imperative that creeping protectionism be thwarted and reversed."