Greenspan Concerned Over Deficits' Future Impact
 

After getting a call this morning from my financial advisor suggesting that I put some of my money in European stocks, I decided to post this article to get some opinions:


Greenspan concerned with weak dollar

http://money.cnn.com/2004/11/19/news...ex.htm?cnn=yes

Federal Reserve chairman says U.S. must address trade, budget deficits or face future woes.
November 19, 2004: 8:59 AM EST


NEW YORK (CNN/Money) - Federal Reserve Chairman Alan Greenspan warned the U.S. must deal with the causes of the weak dollar -- the U.S. trade deficit and the federal budget deficit -- or the country could run into economic problems down the line.

Greenspan said that while history has shown that developed countries are not necessarily hurt by a weak currency, "we cannot become complacent. History is not an infallible guide to the future," he said in a speech delivered in Europe.

"More will need to be done in Europe as well as in the United States to ensure that our economies are sufficiently resilient to respond effectively to all the shocks and adjustments that the future will surely bring," he concluded.

Greenspan focused on the nation's current account deficit, the measure of both trade and investments across the national board, which he said has risen to more than 5 percent of the gross domestic product, the broad measure of the nation's economy.

"It seems persuasive that, given the size of the U.S. current account deficit, a diminished appetite for adding to dollar balances must occur at some point," he said.

Greenspan said it is therefore important that the U.S. budget deficit be cut, a move that would reduce the current account deficit.

"Reducing the federal budget deficit (or preferably moving it to surplus) appears to be the most effective action that could be taken to augment domestic saving," he said. "Corporate saving in the United States has risen to its highest rate in decades and is unlikely to increase materially. Alternative approaches to reducing our current account imbalance by reducing domestic investment or inducing recession to suppress consumption obviously are not constructive long-term solutions."

The value of the U.S. dollar, which has been hitting a series of four-year lows versus the yen and record lows against the euro during the last couple of weeks, fell following Greenspan's remarks.

Worries me.

It doesn't worry me and it doesn't worry Greenspan either. Greenspan has talked extensively about how these years are different from previous years and he essentially follows a school of thought which says that borrowing can go on since the markets are floating with currency and the US markets are the most liquid.

What is tied into this and isn't being addressed is how the Yuan and the euro are valued. The EU is not the slightest bit happy about their currency valuation.

Anyway, if you want my 2 cents, I have quite a bit of my money diversified globally. I look for 30% gains and unless I put in an extraordinary amount of time doing hourly and daily trades in US markets, it's hard to make that. I have stock in a couple Euro pharmas and a Swiss mutual fund as well as some money in a combo hedge/mutual fund that does foreign exchange trading in Europe. My biggest gains are...India and my riskiest (so far my biggest losses) are China. By the way, get rid of your financial advisor and look into a diversified portfolio with a few indexes - unless you are an extremely wealthy individual he reduces your rate of return quite a bit.

-Rudey

Here is something else. There is a large number of people that sees that fall of the dollar as not hurting the US as much as it is considered a form of punishment on Europe. The dollar is tied to the Yuan so unless Asian and Chinese banks were to unload US currencies completely the US economy won't be "punished". It would also help if Europe decided to buy up the US dollar to counter.

So people who invest in Europe need to be careful. It depends what sector you invest in given the higher rates. This is nasty for certain export industries...

-Rudey

I'll admit that I am not all that savvy about financial ventures, etc. but how can a huge deficit be a plus for our currency and country? I mean, I usually follow the "don't spend what you don't have" rule of thumb, so why can't the USA? I do realize the national budget needs room to "move around" but I was perfectly comfortable with a surplus in the national budget.

India...you mean, that country with cities that are basically just like NYC and Chicago? :eek: GET OUT!

Seriously, I need to start investing a little bit more aggressively than I have been.

Some must be so much more knowledgable than others!

Amazing when Greenspan is one of the smartest financial people and He is worried.

The dollor is being devalued by most of the industrial nations which in turn hurt trade and cost of goods. Guess what financial wizard, people cannot buy products.

It does not take a friggin genius to figure out that you cannot keep spending money like the US Govt. does without money coming in to pay the damn bills.

Try this in your own house hold and see how long you get away with it!

Lets out source more jobs and products, that really helps doesnt it?:rolleyes:

By the way, does anyone know how unemployment figures come from?:(

Unemployment offices, dah!

Well guess what sports fans, when you run out of money for unemployment, you are taken off of the rolls.

1) Its spelled "dollar."
2) The dollar being devalued helps the U.S. trade deficit because U.S. goods become less expensive.

I was wondering when someone was going to mention the effect on the trade deficit. It's not as bad of a situation as it's made out to be.

It is not your house. This is the US government. We have arguably the MOST liquid fixed income market in the world with Europe behind. Fixed income is in reference to debt/bond markets because I know you don't know what that is. Asian countries tried to develop bond markets but weren't able to because they couldn't be liquid. Essentially that means that their citizens are forced to invest their capital in the debt of other countries...basically the US. They have absolutely no choice in the matter.

Greenspan is but one person in the wheel of economic thought in the world. And guess what? If you want to see where the economy is going either learn what Greenspan is saying or watch someone who is compensated on his thoughts. Greenspan is not but regardless, Greenspan has constantly discussed the vast access to capital and debt markets for the US. He has constantly talked about deficits but in a context of the environment and the control of them causes no concern to anyone really except the Europeans until they are essentially FORCED to buy American capital and debt this year (which will happen).

But what the fuck do I know right? I only put my money where my mouth is by investing my own money (not through a mutual fund) and have the experience of working for one of the largest fixed-income shops in the world.

-Rudey

The interest rate affects different sectors differently. In terms of the deficit it is "brutal" as the Europeans put it for some sectors? For who? Well the ones it is most brutal on is the Europeans and it is the test of the deficit and the dollar trade rate that is considered the first and most important test for the Euro. Will it pass? It should once they buy into it.

-Rudey