becker
Definitively Illumined
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Remarks by Chairman Alan Greenspan
Before the Banco de Mexico's 80th Anniversary International Conference, Mexico City (via videoconference)
November 14, 2005
Stability and Economic Growth: The Role of the Central Bank
International finance presents us with a number of intriguing anomalies, but the one that seems to bedevil monetary policy makers the most as they seek stability and growth (the topic of this conference) is the seemingly endless ability of the United States to finance its current account deficit.
To date, despite a current account deficit exceeding 6 percent of our gross domestic product (GDP), we--or more exactly, the economic entities that comprise the U.S. economy--are experiencing few difficulties in attracting the foreign saving required to finance it, as evidenced by the recent upward pressure on the dollar. The markets are not behaving in the way that some, if not most, analysts anticipated as the U.S. current account deficit rose above its previous high of 3-1/2 percent of GDP recorded in 1986.
Of course, deficits that cumulate to ever-increasing net external debt, with its attendant rise in servicing costs, cannot persist indefinitely. At some point investors will balk at further financing. Such a development would be particularly likely should risk-adjusted rates of return on assets outside the United States rise relative to investment opportunities in the United States. Even if such returns on U.S. assets stay high, the rise of concentration risks in foreign official and private portfolios could still induce investors to slow their accumulation of dollar claims and thereby delimit the size of the financeable U.S. current account deficit.
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11-14-2005 11:52 PM
