Dollar's Dip Shows Greenspan in Denial

Clearly, the Fed chairman had to give the appearance of concern in this speech, or else the market would have reacted twice as badly as it did. And Greenspan's worry was what captured the headlines.

Quoted just about everywhere were these words of his: "Current account imbalances, per se, need not be a problem, but 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." At first glance, that comes across as opaque central-bank speak, but it's Greenspan's way of saying that it is clearly a problem if America has to keep on borrowing larger and larger sums from foreigners to pay for the consumption and investment the U.S. hasn't got the savings to finance.

But the rest of the speech was artful dissembling. To see why, we must recognize what has led us to the mess we're in. The current account deficit has grown to a grotesque size and become such a worry to the world because Americans are consuming beyond their means. They're doing that on easy credit. And the reason that credit has been so easy is that Greenspan has kept interest rates at artificially low rates.

Haste Makes Waste

Current account deficits are not so much to be feared when foreigners are pouring investment dollars into the U.S. After all, that helps make American companies more productive, which means in the future they'll have the means to pay back the foreign financing.

That just isn't happening now. American companies have a small surplus of savings. But for the first time in decades, it is households that are in deficit, points out Paul Kasriel, chief economist at Northern Trust. (By deficit he means personal income minus expenditures on consumption and residential investment.) In addition, the government also has a deficit that has been mainly created by sharply higher defense, education and health care spending under Bush.