When Alan Greenspan spoke last week, the media heard only one thing: a warning about the trade deficit.
Case in point: (entire article from Forbes.com here)
Stocks fell substantially Friday as Federal Reserve Chairman Alan Greenspan sounded a warning over the nation's spiraling trade deficit, while rising oil prices raised fresh worries about energy costs heading into winter. The Dow lost more than 104 points in afternoon trading.
Wall Street paid close attention to Greenspan's unusually frank assessment of the trade imbalance and its effect on the U.S. economy. The Fed chairman said the economy was resilient thus far, but would be vulnerable to foreign influence should the deficits continue to build.
"Certainly that has investors worried, though I'm not entirely sure why Greenspan chose to make a case out of this," said Lincoln Anderson, chief investment officer at LPL Financial Services in Boston. "The lower dollar will eventually force importers to raise prices, and that'll help cut the trade deficit. But nonetheless, it was unusual for him to speak out on it like that, and it's having an effect."
"Unusually frank?" "Make a case out of this?"
A little out of the usual territory for a Greenspan speech? Maybe. But I think the media overreacted. The stock market definitely overreacted. Nonetheless, there's really nothing in Greenspan's speech with which I would take issue. I say pretty much the same thing in my open economy macro course, and have for some time. I wouldn't call his comments "unusually frank." I've seen central bank speeches that were unusally frank, and in my opinion, this wasn't.
At best it was a little curious that he chose to talk about the US trade deficit at a panel discussion on the euro. However, I think most economists can make the connection here. I've lectured to my students until I am blue in the face that the US trade deficit could lead to a weaker dollar, that is, a stronger euro (which is exactly what is happening). And an abnormally strong euro is a bit uncomfortable for Europe... ok, "brutal" is one word that has been used. Sometimes I wonder whether the Europeans are more upset with our appetite for cheap Chinese goods or with our foreign policy. Some days it's a tossup.
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