Dollar's Dip Shows Greenspan in Denial

As a result, America is borrowing from abroad to finance spending by individuals and the government. Spending by these two adds almost nothing to the productivity of the economy, and that means America is less likely to generate the extra returns needed to repay foreign financing. The large inflows of foreign capital should not be seen as a vote of confidence in the U.S. economy by foreign entrepreneurs. Nor should they be seen as evidence that foreigners are happy to finance the deficit.

That's because foreign central banks have been doing a large portion of the buying, and they are only parking the dollars that have flooded into their reserves as America sucks in goods and services from abroad.

In the 12 months ending Sept. 30, foreign nonprivate net purchases of U.S. Treasuries totaled $214 billion, compared with $78 billion in the same period ending Sept. 30, 2003. By contrast, private foreign purchases of Treasuries inched up to $167 billion from $162 billion over the same period.

In his speech, Greenspan says this: "Even considering heavy purchases by central banks of U.S. Treasury and agency issues, we see only limited indications that the large U.S. current account is meeting financing resistance." But notice that Greenspan gives no numbers to make his case there. And it is absolutely the case that, without those central-bank purchases, the dollar would be a lot lower today.

Christmas in July

Greenspan did sort of acknowledge the two main causes of this problem: the fiscal and household deficits. He's been a fiscal conservative for a long time, so he's being consistent in his speech when he calls for a budget surplus. But when it comes to the unprecedented and deeply harmful household deficit, Greenspan merely tosses in this line: "Significantly increasing private saving in the United States ... of course would also be helpful." Absolutely no mention of the Fed's role in giving people an incentive to borrow like never before and run down the savings rate to current low levels.