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Last Updated: Saturday, 20 November, 2004, 02:38 GMT
Greenspan warns over US deficit
By Andrew Walker
BBC economics correspondent

Fed chairman Alan Greenspan
Alan Greenspan has joined the chorus of warnings
US Federal Reserve chief Alan Greenspan has warned that the deficit in US trade with the rest of the world cannot be sustained indefinitely.

But Mr Greenspan, in a speech in Germany, could not say when or how the adjustment would take place.

The deficit in US international trade is large by any standards - more than $500bn over the last year, or more than 5% of the country's economy.

Many economists say it is unsustainable and adjustment could be painful.

But the deficit has been large for a decade and the adjustment has not happened.

Nonetheless, Mr Greenspan has joined the chorus of warnings.

He is not predicting certain catastrophe now or indeed at any stage in the future. But the implication is clear, that the inevitable adjustment might come in a disruptive form.

Cumulative deficits, which result in a marked decline of a country's net international investment position - as is occurring in the United States - raise more complex issues
Alan Greenspan

He focused on the financing of the deficit. In essence, a trade deficit needs to be supported by foreigners investing in the US.

If they suddenly become reluctant to do so, the result in the financial markets could be either a sharp rise in interest rates or a fall in the dollar.

There was also a call in Mr Greenspan's speech for the US government to tackle the deficit in its finances - or even move into surplus - as an effective way of tackling the trade gap.

President Bush has said he plans to halve the deficit in the government's finances. But it is clear that the government will continue borrowing.

On Friday, the president signed a new law that will allow the government to borrow further $800bn.

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