Greenspan Says Globalization Driving U.S. Current Account Gap

The US current account deficit has skyrocketed in recent years, reaching an unprecedented 6.3 percent of Gross Domestic Product. Outgoing Federal Reserve Chairman Alan Greenspan attempted to explain the widening of that gap yesterday, arguing that the gap reflects “a pronounced new phase of globalization.” Globalization, says Greenspan, has weakened “home bias”—the tendency to invest in one’s own country—and allowed foreign investors to finance a larger US current account deficit than ever before. The gap is thus a natural outgrowth of the free international flow of capital, and government intervention is unlikely to reduce it. It will not, however, persist indefinitely: Greenspan believes that the world will eventually lose its appetite for investment in the US, and that the current account gap will thus be closed by the same international market that created it. Economists have differed on whether this will be achieved by a “soft landing,” in which foreign investment gradually wanes in the face of rising interest rates and a declining dollar, or a “hard landing” that sees a disastrous collapse in both the dollar and the wider world economy. The US has every reason to expect the first, healthy scenario, argues Greenspan—but, to ensure its continued economic success, it must embrace the free-market competition and flexibility of globalization. – YaleGlobal