Greenspan says budget is worrying

Federal Reserve Chairman Alan Greenspan says he is not "overly" concerned about the record US trade gap and heavy consumer debt loads, but the nation's budget outlook gave him pause.

"The resolution of our current account deficit and household debt burdens does not strike me as overly worrisome, but that is certainly not the case for our fiscal deficit," Mr Greenspan told the Council on Foreign Relations in New York this week.

"Our fiscal prospects are, in my judgment, a significant obstacle to long-term stability because the budget deficit is not readily subject to correction by market forces that stabilise other imbalances," he said.

The Fed chief said rapid globalisation may have allowed the United States to carry large trade and budget gaps so far without economic harm.

"Has something fundamental happened to the US economy that enables us to disregard all the time-tested criteria for assessing when economic imbalances become worrisome?" Mr Greenspan asked rhetorically. "Regrettably, the answer is no; the free lunch has still to be invented."

"We do, however, seem to be undergoing what is likely, in the end, to be a one-time shift in the degree of globalisation and innovation that has temporarily altered the specific calibrations of those criteria," he said.

Foreign investors are effectively funding record shortfalls in the US budget and current account, the broadest measure of the nation's trade, and some economists fear an abrupt reversal in investor confidence could hit the American economy hard.

When exchange rate swings are taken into account, Mr Greenspan said, global investors so far have only modestly shifted away from dollar assets. He did repeat, however, that foreign investors may at some point decide they are holding too many dollar-denominated assets.

He also reiterated that if the dollar were to drop further, foreign exporters could decide to no longer absorb the impact by accepting smaller profits. In that case, he said US import prices would rise and the trade gap would narrow.

Mr Greenspan credited increasingly open global trade with lowering inflation and stabilising economies, and said it could rebalance global trade without a crisis.

"Should globalisation continue unfettered and thereby create an ever-more flexible international financial system, history suggests that current account imbalances will be defused with modest risk of disruption," he said. "The greater the degree of... flexibility, the less the risk of a crisis."

Taking audience questions after his wide-ranging address, Mr Greenspan said purchases of US government bonds by foreign central banks trying to keep their currencies down against the dollar had only a small impact on US interest rates.

"As best we can figure out... it's really modest," he said. "We're talking about something in the area of 50 basis points - sometimes less, maybe sometimes more."

In his speech, Mr Greenspan downplayed concerns that the high debt loads and low savings of US consumers carried the seeds of a future economic downturn.