The large influx of foreign money shows that "sound, growth enhancing economic policies are continuing to make the U.S. an attractive place to invest," he said.
Taylor said administration policies already in place will help shrink the trade deficit. One is President Bush's pledge to cut the budget deficit in half, as a percentage of the U.S. gross domestic product, by 2009. That would decrease the trade deficit because lower government spending or higher taxes would reduce the amount of money consumers spend on imported goods.
Taylor pointed out that the Treasury is also prodding foreign governments to achieve faster economic growth, which should increase demand for U.S. exports, and it is trying to persuade China to change its fixed-exchange rate policy by allowing its currency, the yuan, to rise. A higher yuan would be likely to slow the flood of Chinese goods into the U.S. market because those products would become more expensive for U.S. consumers.
"Even if those policies take some time" to reduce the trade deficit, Taylor said, "there is no reason to think there will be problems in the meantime" in continuing to obtain enough money to cover the gap.
Taking issue with analysts who have voiced concern about a recent drop in investment by foreigners in U.S. Treasury bonds, Taylor said: "It is important to put the current account in the perspective of the total amount of financial flows crossing U.S. borders in large, open and flexible markets."
He cited the fact that the current account deficit increased by $19 billion in the second quarter even though government data showed a decline of about $180 billion in purchases of U.S. assets by both foreign central banks and private investors. The U.S. economy experienced no turbulence because U.S. buyers in effect replaced the foreigners.
Taylor's views were seconded by some of the other speakers at the seminar, including Allan H. Meltzer, a professor at Carnegie-Mellon University. But others maintained that the current account gap is certain to drive the dollar down one way or another -- either gently and gradually, or suddenly and sharply. Although a gradual move downward would help the economy by boosting exports, it would erode U.S. living standards below what they would be by making imported goods more expensive.
President Bush's news conference yesterday did little to lessen concerns over the deficits, Wall Street analysts and currency traders said. Bush simultaneously promised not to raise taxes under the guise of tax simplification, to pursue a costly restructuring of Social Security and to cut the budget deficit in half by 2009.
The currency markets aren't buying it, said William G. Gale, an economist at the Brookings Institution.
White House officials "have Alan Greenspan to help keep interest rates down, but they can't control the foreign exchange markets," Gale said. "I think investors are acting appropriately."
