Federal Reserve Board Chairman Alan Greenspan predicted yesterday that the U.S. trade deficit will level off and possibly shrink in months and years to come, in a speech that took a less alarmist view of the trade gap than he has offered recently.
Greenspan cited the decline in the U.S. dollar as the main factor that is "poised to stabilize and over the longer run possibly to decrease" the trade deficit. A cheaper dollar makes U.S. products more competitive against goods produced abroad.
Alan Greenspan made note of the previously silent "voice of fiscal restraint," the White House promise to shrink the budget deficit.
(Bruno Vincent Via Bloomberg News)
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Up to now, trade figures have defied expectations that a weakening dollar would cause the gap to narrow. Even though the dollar has fallen steadily against most major currencies since early 2002, U.S. imports have continued to surge, and exports have failed to keep pace. The result is a trade gap that was running at an annual rate of over $600 billion in the first 11 months of 2004, far above the previous year's record of $497 billion.
That trend should change, Greenspan contended in a speech delivered at a conference in London, the text of which was published on the Fed's Web site. Foreign firms, which have been restraining their prices in the U.S. market to stay competitive, will soon be forced to raise the prices of the goods they ship to the United States, he said.
"We may be approaching a point, if we are not already there, at which exporters to the United States, should the dollar decline further, would no longer choose to absorb a further reduction in profit margins," Greenspan said.
At the same time, "U.S. exporters' profit margins appear to be increasing," Greenspan said, partly because the money they earn on sales abroad has risen, in dollar terms, as other currencies strengthen against the dollar. That "bodes well for future U.S. exports," he said.
Greenspan's forecast concerning the trade gap contrasts with predictions by many other analysts.
According to projections by Catherine L. Mann of the Institute for International Economics, the current account deficit -- the widest measure of the trade gap -- could widen from the 2004 level of about 6 percent of gross domestic product to 8 percent by 2008, and to even higher levels by 2010, unless there are significant changes in the policies and exchange rates of the United States and its main trading partners. In an apparent reference to such forecasts, former Treasury secretary Robert E. Rubin, appearing at the same conference as Greenspan, said that the U.S. budget and current account deficits "may have a tendency to get worse rather than better."
But Greenspan, more than any other figure, commands the attention of financial markets, and his comments helped buoy the dollar, which was trading late yesterday at $1.2878 per euro, the highest exchange rate in three months against the common European currency.
Greenspan has previously issued much gloomier pronouncements on the trade deficit, focusing on the growing dependency of the United States on inflows of foreign capital. The trade gap essentially requires the United States to borrow hundreds of billions of dollars annually from abroad because foreigners take the dollars that Americans pay for imported goods and invest them in U.S. securities such as Treasury bonds.
In late November, Greenspan suggested that the trade deficit, and the attendant accumulation of U.S. securities by foreigners, would almost certainly cause a further decline of the dollar. "Given the size of the U.S. current account deficit, a diminished appetite for adding to dollar balances must occur at some point," he said in that speech.
Greenspan did not repeat that admonition yesterday, although he did not repudiate it, acknowledging that the immense amount of money and goods traversing national borders makes forecasting difficult.
"I have argued elsewhere that the U.S. current account deficit cannot widen forever but that, fortunately, the increased flexibility of the American economy will likely facilitate any adjustment without significant consequences to aggregate economic activity," he said, in a passage that footnoted the November speech. "That argument will be tested, I suspect, by possibly new twists and turns that will emerge in a seemingly ever more complex international economic and financial structure."
Greenspan was speaking in advance of a meeting among finance ministers and central bank governors of the Group of Seven major industrial countries, for whom the U.S. trade deficit has been a major source of concern. Reflecting those worries, Mervyn King, governor of the Bank of England, told the conference: "There is likely to be a limit to the amount of debt that one country can issue as a result of persistent deficits before investors start to worry about its ability or willingness to repay." King's comments were posted on the Bank of England's Web site.
But Greenspan said that in addition to the dollar's fall, other factors should cause the trade deficit to narrow, including a reduction in the U.S. budget deficit, which would cause demand for imports to decline.
Apparently referring to President Bush's promise to shrink the budget gap in half by 2009, Greenspan said, "The voice of fiscal restraint, barely audible a year ago, has at least partially regained volume."
