November 20, 2004
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Posted on Sat, Nov. 20, 2004
Greenspan does it again
HE SOUNDS WARNING ON FOREIGN CAPITAL; INVESTORS UNNERVED
Chicago Tribune
CHICAGO – In remarks that roiled the financial markets, pushing the value of the dollar ever lower, Alan Greenspan warned that America’s reliance on foreign capital poses a risk to the domestic economy.
The Federal Reserve chairman, in a speech at the European Banking Congress in Frankfurt, Germany, said foreign investors could grow tired of financing the U.S. current account deficit and put their money elsewhere unless they receive higher interest rates.
Like the trade deficit, the current account deficit tracks goods and services but also includes investment flows between countries. The deficit grew to a record $166.2 billion in the second quarter. For all of 2003, it was more than $500 billion.
Although Greenspan said there was little sign so far that overseas investors and central banks have lost faith in the U.S. economy, his warning rattled Wall Street and currency markets.
The Dow Jones industrial average tumbled nearly 116 points, its largest decline in two months. The dollar dropped to 103.08 against the Japanese yen from 104.09 Thursday, and to $1.3020 per euro from $1.2961. Prices of Treasury bonds fell sharply.
“Given the size of the U.S. current account deficit, a diminished appetite for adding to dollar balances must occur at some point,” Greenspan said. “International investors will eventually adjust their accumulation of dollar assets or, alternatively, seek higher dollar returns to offset concentration risk, elevating the cost of financing the U.S. current account deficit and rendering it increasingly less tenable.”
Although Greenspan didn’t specifically address interest rates or the value of the dollar — “forecasting exchange rates has a success rate no better than that of forecasting the outcome of a coin toss,” he said — investors read between the lines.
“He’s telling people rates are going to keep going higher and the dollar is going to keep going lower,” Scott Gewirtz, co-head of U.S. Treasury trading at Deutsche Bank Securities in New York, told Bloomberg News.
As the trade deficit grows, more dollars leave the United States. So far, foreign investors have recycled this money by buying U.S. Treasury securities — which finances the government’s budget deficit — or stocks, corporate bonds and other dollar-denominated investments.
The recycling has helped keep interest rates low and buoyed the stock market. Were overseas investors and central banks to reduce their buying or unload their investments, it would cause stocks and bonds to sink and interest rates to soar.
“Greenspan is saying that day might not be far down the road,” said Ken Goldstein, an economist for the New York-based Conference Board, a private research group. “Once this process starts, it’s very difficult to change.”
Marc Pado, U.S. market strategist for investment firm Cantor Fitzgerald, said the growing deficit could “deter future investments,” though he does not expect overseas investors to dump their current assets.
The slide in the dollar has unnerved investors recently because it raises the cost of foreign goods, from Japanese cars to Canadian lumber to German pharmaceuticals.
Gita Gopinath, assistant professor of economics at the University of Chicago Graduate School of Business, said a continuing rapid decline in the dollar’s value “will have an inflationary effect on the economy.”
That’s because more expensive imports allow domestic producers to raise prices, something that has been impossible for years because of competition at home and abroad.
A cheaper dollar does have some benefits. It has been good for U.S. manufacturers because it makes their products less expensive in foreign markets. That can help exports and narrow the trade gap.
Manufacturing and agricultural exports, both important sectors of the Midwest economy, especially benefit, as do the jobs such exports generate.
“There has been a lot of talk about outsourcing labor overseas,” said Pado. “A falling dollar works against that trend.”
Greenspan also said the Bush administration should work to reduce the country’s budget deficit.
“Reducing the federal budget deficit — or preferably moving it to surplus — appears to be the most effective action that could be taken to augment domestic saving,” he said.
November 20, 2004
Greenspan Sees No Rise Soon for the Dollar
By MARK LANDLER
RANKFURT, Nov. 19 – Alan Greenspan came to the home of the euro on Friday and suggested that the relentless decline of the dollar might well continue, offering little relief to those here who worry that the United States is seeking to gain a competitive advantage for its industries from a weaker currency.
In a speech to a banking congress here, Mr. Greenspan, the chairman of the Federal Reserve, said that ballooning foreign borrowing on the part of the United States poses a future risk to the dollar’s value.
He said that foreign investors, who help finance the large American trade and budget deficits by buying Treasury securities and other dollar-denominated assets, would eventually resist lending more money to the United States, causing the dollar to fall further.
Mr. Greenspan’s comments came two days after the Treasury secretary, John W. Snow, appeared to rule out intervening in currency markets to help Europe and Japan – both heavily dependent on exports to sustain economic growth – stem the decline of the dollar. Mr. Snow, speaking in London, prodded European leaders to tackle their home-grown economic problems.
Taken together, the two speeches appear to be sending an unmistakable message that Washington, on the heels of
President Bush’s election to a second term, is prepared to tolerate a weaker dollar for the foreseeable future.
A falling dollar makes it more expensive for Americans to travel abroad and risks reviving inflation and sending interest rates higher in the United States. But for American manufacturers, who have been shedding jobs for years, it provides a powerful shot of adrenaline by making their exports cost less abroad and adding to pressure on foreign industries to raise the price of imported goods in the United States.
Given the uncertainties surrounding the global economy, Mr. Greenspan likened predicting the dollar’s path to “forecasting the outcome of a coin toss.”
While Mr. Greenspan, as he often does, relied on carefully chosen phrases open to various interpretations, the message seemed clear here to European bankers, who laughed nervously at the metaphor: The dollar, which has fallen to record lows against the euro this week – giving fits to European politicians and business executives – is likely to fall even further.
To analysts, the speech had a laissez-faire tone, leaving events in the hands of the market and giving speculators free rein to bet against the American currency without worrying that officials would get together to slap them down.
On Friday, in New York, the stock market reacted by falling sharply. At the close of trading, the Dow industrial average was down more than 115 points, to 10,456,91, a decline of more than 1 percent.
Currency traders drove the dollar to its lowest level in four and a half years against the Japanese yen, and near its record low against the euro. Treasury notes fell the most in two weeks.
The hints from Washington policy makers that they have no intention of supporting the dollar could add to the strains between the United States and Europe, which is increasingly worried that the rise of the euro is choking off its tenuous recovery. In France and Germany, growth in the third quarter dropped to 0.1 percent, as exports dried up.
European leaders are already raising distress flags. Germany’s minister for economics, Wolfgang Clement, urged Asia, Europe and the United States to take coordinated action to stop the slide. The president of the European Central Bank, Jean-Claude Trichet – who is Mr. Greenspan’s counterpart here – has called the shifts in exchange rates “brutal.”
Mr. Trichet, who traveled a few blocks from the headquarters of the European Central Bank to appear on the same panel as Mr. Greenspan, pointedly declined to repeat that characterization.
Both central bankers later flew to Berlin for a meeting of the G-20, which includes the Group of 8 industrialized countries, as well as emerging economies. The downward path of the dollar is likely to be high on the agenda, but there is little hope for a concerted response.
Analysts said Mr. Greenspan’s speech made it clear that the Federal Reserve would make no effort to influence the process of narrowing the United States’ current account deficit, either through interest rate increases aimed at deliberately supporting the dollar or by intervening in the market.
The current account deficit, which encompasses annual trade as well as the balance of financial flows, has gone from zero in 1990 to nearly $600 billion this year. The nation’s accumulated debt to foreign investors is $2.6 trillion, equivalent to 23 percent of the annual output of the economy.
“It was an either-or message,” said Thomas Mayer, the chief European economist at Deutsche Bank. “Either the current account deficit comes down. Or the market will do it, but at a cost to the dollar. Will the Fed play a role in this? Probably not. It will stick to its mandate.”
Speaking on a panel that included the deputy governor of the Bank of Japan, Kazumasa Iwata, Mr. Greenspan devoted most of his remarks to the effect that American fiscal policy has on global markets.
“Current account imbalances, per se, need not be a problem,” he said in a characteristically technical speech, “but cumulative deficits, which result in a marked decline of a country’s net international position – as is occurring in the United States – raise more complicated issues.”
Mr. Greenspan said foreign investors, in part because they fear having too much money at risk in the United States, would eventually become reluctant to take on more such assets.
“It seems persuasive that given the size of the U.S. current account deficit, a diminished appetite for adding to dollar balances must occur at some point,” Mr. Greenspan said. “But when, through what channels, and from what level of the dollar? Regrettably, no answer to those questions is convincing.”
This is not the first time Mr. Greenspan has warned about the risks of a rapidly widening current-account deficit. In testimony before Congress last February, he said “foreign investors, both private and official, may become less willing to absorb ever growing claims on U.S. residents.”
As he did last winter, Mr. Greenspan said on Friday that his preferred remedy would be for the Bush administration to bring down the current account deficit by taking steps to shrink the federal budget deficit. That would make more domestic savings available in the United States, reducing the dependence on foreign borrowing.
But analysts did not interpret Mr. Greenspan’s remarks as a rebuke of the White House – which has indicated that it will seek to make the deep tax cuts of its first term permanent – but rather an effort to let the markets find their course.
That will be cold comfort to many Europeans, who say that their currency is absorbing the bulk of the pressure from the declining dollar, since Japan and other Asian countries have intervened aggressively in the market to prevent their currencies from rising significantly against the dollar.
Mr. Greenspan took issue with that suggestion, saying that based on his review of recent statistics, Asia’s “very large” central bank interventions had had only a “moderate” effect on exchange rates.
For his part, Mr. Trichet seemed determined not to breathe another word about the dangers of a rising euro. Describing his previous comments on the subject as “poetry,” he turned aside questions about the exchange rate.
Mr. Mayer of Deutsche Bank said Mr. Trichet’s silence suggested that his earlier efforts to talk down the currency had fallen short.
“They are basically seeing that there is very little they can do about it,” Mr. Mayer he said. “They are not in a position to change interest rate policy to address it.”
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