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Fed officials scoff at US debt threat

Two top Federal Reserve officials argued on Thursday that the US' record level of foreign indebtedness was unlikely to pose a major risk to the nation.

"The resolution of our current-account deficit and household debt burdens does not strike me as overly worrisome," said Federal Reserve Board Chairman Alan Greenspan, according to a transcript of a speech he gave to the Council on Foreign Relations in New York.

Greenspan said the world was undergoing a "one-time shift in the degree of globalization and innovation that has temporarily altered the specific calibrations" for evaluating economic imbalances.

Although Greenspan acknowledged that globalization had its limits, he said it was impossible to know how long the trend could continue.

"The closing of our frontier at the end of the 19th century, for example, did not signal the onset of a new era of economic stagnation," he remarked.

A member of the Fed board of governors, Ben Bernanke, went even further than Greenspan by attributing the US' huge and rising foreign indebtedness to a "savings glut" in Asia and most other parts of the world, according to a transcript of his speech to the Virginia Association of Economists in Richmond.

"Over the past decade, a combination of diverse forces has created a significant increase in the global supply of saving -- a global saving glut," Bernanke said.

Bernanke acknowledged that this shift could pose problems for the US at some point. The flood of foreign imports has led to a "shrinkage" of US manufacturing and its potential for exports, he said. But like the Fed chairman, Bernanke said the imbalances would gradually readjust on their own, and added, "I see no reason the process should not proceed smoothly."

The fairly upbeat Fed assessments ran counter to those of some outside analysts, who warn that the nation's soaring trade and financial deficits could lead to a severe drop in the value of the dollar and perhaps to higher interest rates.

Analysts estimate that the US trade deficit soared to more than US$600 billion last year, or nearly 6 percent of GDP.
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