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February 11, 2005

Misspeaking

Alan Greenspan appears to fall off the tightrope: a rare event, but it's hard to keep walking on the expectations-managing tightrope when all the fundamentals are against you.

The word from inside the Federal Reserve is that Alan Greenspan is *not* optimistic about the dollar and *not* unconcerned about the U.S. budget deficit: that he was trying to express concern without triggering a dollar sell-off: that his words have been misinterpreted by markets as being more optimistic than they were intended to be.

John Berry of Bloomberg reports:

: Federal Reserve Chairman Alan Greenspan, speaking in London last week, put the best face he could on the outlook for the burgeoning U.S. current account deficit. Currency markets, perhaps misled by the seemingly hopeful tone of Greenspan's remarks, responded by bidding up the value of the dollar. They should have listened more closely to all his carefully worded caveats and conditional phrases....

In his Feb. 4 speech, Greenspan ticked off several major reasons why the U.S trade deficit isn't likely to shrink anytime soon.... The first negative, a very big one, was the fact that U.S. imports are so much greater than exports that ``exports must grow half again as quickly as imports just to keep the trade deficit from widening -- a benchmark that has yet to be met,'' Greenspan said.... A second negative he cited is the U.S. tendency to import more than its trading partners do when their respective growth rates are the same. On top of that, of course, is the fact that the U.S. economy lately has been growing much faster than its industrial nation partners, he said. A third negative from Greenspan was that the surge in world oil prices has also helped deepen the trade deficit.

So what seemed upbeat in the speech?... European exporters have been willing to see their profit margins shrink rather than raise their prices and lose market share in the U.S., though that may be coming to an end. ``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,'' the Fed chairman said. Note the ``may be.''...

As positive developments, Greenspan also mentioned the possibility that the federal budget deficit may be about to decline and that household saving may turn up again as the huge wave of home mortgage refinancing begins to ebb... any noticeable reduction in the federal budget deficit appears to be a remote possibility for either fiscal 2005, which ends Sept. 30, or fiscal 2006, given the negative reaction in Congress to many of the spending cuts proposed this week by President George W. Bush in his 2006 budget....

``Numerous issues that have arisen with respect to the adjustment of the U.S. current account remain unresolved,'' Greenspan concluded. ``One is the effect of Asian official purchases of dollars in support of their currencies. Such intervention may be supporting the dollar and U.S. Treasury bond prices somewhat, but the effect is difficult to pin down.'' Pin it down or not, Chinese authorities have shown no willingness to stop interventions to keep their currency tightly pegged to the dollar....

Posted by DeLong at February 11, 2005 10:04 AM