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Greenspan Sounds Alarm

Fed Chairman Warns Against Deficit Complacency

By Nell Henderson
Washington Post Staff Writer
Saturday, November 20, 2004; Page E01

Federal Reserve Chairman Alan Greenspan yesterday urged the federal government to reduce its budget deficit and to encourage greater personal saving, warning that foreign investors will not finance endless growth in America's huge trade gap.

Greenspan, speaking at a banking conference in Germany, repeated that he believes market forces probably will rein in the trade gap without provoking a financial crisis. But he expressed more concern about the issue than in previous remarks, saying, "We cannot become complacent."

Alan Greenspan said he still thinks market forces will keep the trade gap in control, but his tone on the budget deficit was harsher. (Adam Berry -- Bloomberg News)

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In His Own Words: Greenspan comments and Fed actions since 2001.
Timeline: Interest rate changes since the recession of 1990.
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Federal Reserve Special Report

Greenspan also made his most explicit public comments about the likelihood that interest rates are headed higher. "Rising interest rates have been advertised for so long and in so many places that anyone who hasn't appropriately hedged his position by now obviously is desirous of losing money," he said in answer to a question posed during a panel discussion at the conference, according to a transcript published by Bloomberg News.

Stocks, bond prices and the dollar all fell after Greenspan's comments, which he delivered before attending a weekend meeting of finance ministers and central bankers from a group of 20 wealthy and developing countries. The dollar initially tumbled to its lowest level against the Japanese yen in four years and dropped sharply against the euro, but it regained some ground later.

U.S. Treasury Secretary John W. Snow, on his way to the same meeting, told reporters yesterday that the dollar's recent decline will not be on the G-20's agenda. Snow has said repeatedly in recent days that financial markets should determine currency values -- comments which traders have interpreted as ruling out any kind of government intervention to halt the dollar's slide.

Greenspan's comments appeared to reinforce that impression. They "can hardly be described as an effort to prop the dollar up," according to an analysis by economists at J.P. Morgan Economic Research.

European officials, however, have expressed concern that the dollar's fall, by pushing up the euro, will stymie growth in the nations that share the common currency.

The broadest measure of the U.S. trade gap, the current account deficit, reached a record $550 billion last year and appears headed to around $650 billion this year, which would be equal to 5.7 percent of the nation's gross domestic product. That is up from less than 4 percent before 2000.

The deficit measures the shortfall in trade and investment between the United States and the rest of the world. It generally reflects how much Americans borrow from abroad to finance their spending and investment.

International investors finance the gap by using the dollars they earn through trade to buy U.S. assets, including the Treasury securities sold by the federal government to cover its budget deficit, which swelled to a record $413 billion in the fiscal year that ended Sept. 30.

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