usa deficits , and twits

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    Well written article below except the writer forgot to mention that when Greenspan issued his warning on the yankee stockmarket it went on to double in value or was that tripple ? lol
    ge

    Australia's Henry warns of U.S. bond "exuberance"

    Thursday February 24, 2005, 6:05 pm



    SYDNEY, Feb 24 (Reuters) - The cheap funding of the U.S. current account deficit is worryingly reminiscent of the "irrational exuberance" in U.S. stock markets in the 1990s, Australia's top treasury official said on Thursday.

    At a conference in Sydney, Treasury Secretary Ken Henry also questioned whether the large U.S. deficit could continue to attract funding from foreign central banks.


    "Some countries' monetary authorities are willing buyers of U.S. liabilities, especially U.S. Treasuries, even though they must surely be expecting negative returns," Henry said in his speech on "Macroeconomic policy and structural change in East Asia."

    "But what if they change their mind because the opportunity and holding costs simply become too high? And what happens when they consider their economies strong enough to bear currency appreciation?"

    Asian central banks hold almost $2.5 trillion in foreign exchange reserves. The majority of these are believed to be held in U.S. dollar assets as a result of the region trying to counter the broad weakness in the dollar since 2002 and keep Asian exports competitive.

    Henry noted that the current account deficit in the United States had widened in the past four years to an annual level of around $660 billion, or 5.6 percent of gross domestic product, a record in both absolute terms and as a proportion of GDP.

    He said the deficit had so far defied forecasts from serious observers since the late 1990s that it was unsustainable and would come undone in a couple of years -- just as the stock market had done after Alan Greenspan's caution.

    "Yet what we are seeing with the cheap debt financing of the U.S. current account deficit is worryingly reminiscent of Fed Chairman Greenspan's warning in 1996 of irrational exuberance in U.S. stocks."

    IMBALANCES

    While there was nothing inherently wrong with a highly developed economy running a current account deficit, Henry said the issue was the sustainability of such a large imbalance.

    "Whatever happens, the greater the buildup in structural imbalances, the greater is the risk of a large and sudden adjustment to the U.S. economy, global capital and currency markets; and the more like an adverse shock to all of our economies," he said.

    He said the adjustment of global imbalances is likely to require a mix of policy adjustment -- especially in the U.S. budget deficit -- and structural adjustment in other economies.

    Dollar depreciation by itself might not do much to reduce the deficit on a sustained basis, although a further fall would lift demand for U.S.-produced goods and services, he said.

    Policy adjustments would include greater openness in trade, especially in services, more effective competition and anti-trust policies and enforcement in removing a non-tariff barrier to trade.

    It would also need more effective governance, especially in emerging market economies, and freeing up the labour market, especially in Europe.
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