Monday, November 5, 2007

Greenspan Warning

If the current disturbing drift toward protectionism is contained, and markets remain sufficiently flexible, changing terms of trade, interest rates, asset prices, and exchange rates should cause U.S. savings to rise relative to domestic investment without undermining either production or employment. This would reduce the U.S. need for foreign finance and reverse the trend of the past decade toward increasing reliance on funds from abroad.

You will excuse me if I put a postmortem on my piece. I stipulated that I am basically of the opinion that this is not a huge problem. But if the pernicious drift toward fiscal instability in the United States and elsewhere is not arrested and is compounded by a protectionist reversal of globalization, the current account deficit adjustment process could be quite painful for the United States and our trading partners. I think this suggests how critically important it is for those of us who are involved in the international community to be acutely aware of how dangerous protectionism is in undermining the flexibility of not only the global system, but our internal economies, as well.

-Per Jacobsson Foundation Lecture by Alan Greenspan

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