Record U.S. Current Account Gap Is No Crisis, Fed Officials Say
Record U.S. Current Account Gap Is No Crisis, Fed Officials Say
March 11 (Bloomberg) -- The record U.S. current account deficit will probably correct itself without causing major problems for the world's biggest economy, according to Federal Reserve Chairman Alan Greenspan and Governor Ben Bernanke.
The central bank policy makers downplayed the threat as investors prepared for a report today that may show the U.S. trade deficit widened to the second highest on record in January.
``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,'' Greenspan said in a speech at the Council on Foreign Relations in New York late yesterday.
The U.S. current account deficit, the broadest measure of trade because it includes income from investments and transfer payment, grew 24 percent last year to a record $617.7 billion. Economists expect the Commerce Department to report today that the trade deficit widened in January to $56.8 billion, second only to November's $59.3 billion, led by higher oil prices and demand for imported consumer goods, according to the median estimate of 59 economists surveyed by Bloomberg News.
``The underlying sources of the U.S. current account deficit appear to be medium term or even long term in nature, suggesting that the situation will eventually begin to improve, although a return to approximate balance will take some time,'' Bernanke, 51, said in a speech to the Virginia Association of Economists in Richmond yesterday. ``I see no reason why the whole process should not proceed smoothly.''
`Savings Glut'
Bernanke said a ``global saving glut'' in Japan, Germany and developing countries is fueling the current account deficit in the U.S. Countries such as Thailand and South Korea have increased dollar reserves and paid off debt to prevent a replay of the 1997-98 currency crises that battered their economies. Japanese and German consumers are saving ahead of a wave of retirements.
``The development and adoption of new technologies and rising productivity in the United States -- together with the country's long-standing advantages such as low political risk, strong property rights, and a good regulatory environment -- made the U.S. economy exceptionally attractive to international investors,'' Bernanke said in the speech.
While Greenspan expressed less certainty about the causes of the record current account gap, he said the U.S. economy is well- positioned to adapt to changes in international capital flows.
One-Time Shift
The U.S. seems ``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 level at which imbalances such as the twin budget and trade deficits become worrisome, Greenspan said. At this point, the Fed ``may not be able to usefully determine'' when that might change.
He said international investors might rebalance portfolios to hold a smaller proportional share of dollars ``at some point.''
Yet, ``to date, the proportional shift out of dollars from the total of official and private sector foreign currency accounts has been modest,'' Greenspan said. ``The market absorbed this change in an orderly manner.''
Oil prices rose in January on supply concerns. Employment gains are helping sustain U.S. consumer spending on foreign-made goods, while U.S. companies are investing in capital equipment from domestic and overseas suppliers as demand grows. A decline in the value of the dollar, which makes exports cheaper, may keep the trade deficit from deteriorating this year, economists said.
The U.S. trade deficit is a ``manifestation of two underlying problems,'' said Harvey Rosen, chairman of White House Council of Economic Advisers, in an interview March 9. ``One is that as a society we're not saving enough.'' The second is ``our trading partners are not growing very rapidly,'' he said.
The U.S. economy is projected to expand 3.8 percent this year, according to the median estimate of 66 economists in a Bloomberg survey conducted March 1-8.
By comparison, countries that use the euro as their currency are forecast to grow 1.6 percent this year, according to economists surveyed this month by Blue Chip Economic Indicators.
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