Federal Reserve Chairman Alan Greenspan is more or less comfortable with the US trading gap, hoping for a gradual adjustment, but seriously worried about the fiscal deficit.

Talking to the Council on Foreign Relations in New York, the reputable Fed boss said: "The resolution of our current account deficit and household debt burdens does not strike me as overly worrisome, but that is certainly not the case for our fiscal deficit."

"Our fiscal prospects are, in my judgment, a significant obstacle to long-term stability because the budget deficit is not readily subject to correction by market forces that stabilize other imbalances," he added.

Greenspan stressed the previously mentioned point that rapid globalization and greater economic flexibility have for a while allowed the US to carry wide trade and budget deficits for a long time without serious impact on economy.

Fed Governor Ben Bernanke also mentioned U.S. current account gap in his speech Thursday, attributing it to global factors.

"The underlying sources of the U.S. current account deficit appear to be medium-term or even long-term in nature, suggesting that the situation will eventually begin to improve, although a return to approximate balance may take some time," Bernanke said.

Even so, neither of the Fed officials excluded the possibility of an abrupt disorderly adjustment that could wreak havoc in the markets.

Greenspan’s warnings that foreign investors may get tired of financing US budget deficits. Recent fluctuations in the dollar rate on contradicting statements from Japanese monetary officials reminded of the greenback’s vulnerability to the decisions of the Asian central banks that for years have been accumulating dollar-denominated assets in their reserves.

Greenspan’s comments step up pressure on the Bush Administration to attend to the looming fiscal gap.
"Has something fundamental happened to the U.S. economy that enables us to disregard all the time-tested criteria for assessing when economic imbalances become worrisome?" Greenspan questioned. "Regrettably, the answer is no; the free lunch has still to be invented."

"We do, however, seem to be undergoing what is likely, in the end, to be a one-time shift in the degree of globalization and innovation that has temporarily altered the specific calibrations of those criteria," he said.
Bernanke blamed “global savings glut” for the US trade gap and cited lack of good investment opportunities abroad as a reason for the persistence of low long-term rates.

Greenspan reiterated that a fall in the US currency may force importers to the US to finally raise prices for their goods, as they “would no longer choose to absorb a further reduction in profit margins."

The comments by both policymakers have so far had limited impact on the dollar, but sent the Treasury prices down, raising yields on a10-year note to a seven-month high of 4.53%.