In
November, Mr. Greenspan noted that foreign claims on United
States assets - essentially the nation's net indebtedness
to the rest of the world - were now equal to one-quarter of
the nation's gross domestic product. The trade deficit this
year is almost certain to exceed $600 billion - nearly 6 percent
of the nation's economy, and still climbing.
"This
situation suggests that international investors will eventually
adjust their accumulation of dollar assets or, alternatively,
seek higher dollar returns to offset concentration risk,"
Mr. Greenspan said. That, he continued, would make the cost
of foreign debt "increasingly less tenable."
To
most economists, such comments are simply a statement of time-honored
truth: a borrower who runs up huge debts will become a bigger
risk to lenders and gradually have to pay higher rates. But
Mr. Greenspan's comments also carried a warning: rising budget
and trade deficits come at the price of higher interest rates.
The
Fed fired off another warning in the published minutes from
its policy meeting on Dec. 14, saying, "a number of participants
voiced concerns about domestic and global financial imbalances."
Some members of the Federal Open Market Committee, which sets
policy, were said to believe that the odds of "significant
deficit reduction over the next few years were remote."
More
surprising, the minutes said that some policy makers worried
that the prolonged strategy of low rates might be fostering
"excessive risk-taking" in financial markets and
in the market for houses and condominiums. That sounded like
a veiled reference to concern about a "housing bubble,"
an idea that Mr. Greenspan has repeatedly shot down.
A
third veiled warning came on Jan. 13 from Timothy F. Geithner,
president of the Federal Reserve Bank of New York. In a speech
to financial executives about risk management, Mr. Geithner
suggested that investors had become too complacent about risks
posed by global imbalances - particularly those in the United
States.
Declaring
that the current account deficit had reached an "unprecedented
scale," even as investors continue to demand very low
risk premiums, Mr. Geithner warned that they had little buffer
for unexpected shocks.
"The
present fiscal trajectory entails an uncomfortable scale of
borrowing and little insurance against possible adverse outcomes
in an uncertain world," he said.
