Alan Greenspan, who retires next month after 18 years as head of the Federal Reserve, spoke Friday in London about the problem of global financial imbalances. Mr. Greenspan also addressed U.S. domestic economic issues in a videotaped presentation broadcast from Philadelphia.
In his remarks, Mr. Greenspan warned that the U.S. budgetary imbalance will worsen unless Congress curtails government spending. He called attention to the approaching retirement of the post-World War II baby boom generation, which expects to draw Social Security payments from the government. He expressed concern that the government may have promised more than the economy can deliver to future retirees. Mr. Greenspan, who is 79, warned lawmakers that there could be severe consequences from failing to take action to reduce the budget deficit.
Mr. Greenspan's London speech, delivered in the presence of Britain's top economic policy makers, emphasized the problems associated with America's large foreign trade deficit. He warned that foreign investors may not always be willing to finance the U.S. trade deficit.
"Although foreign investors have not as yet significantly slowed their financing of U.S. capital investments, since early 2002, we have observed a decline in the value of the dollar and reduction in the share of dollars in global cross-border portfolios," he said.
Mr. Greenspan strongly endorsed globalization, the process of ever expanding economic integration across national borders, and warned of the dangers of trade protectionism. He also stressed the importance of countries living within their means.
"If, however, 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 adjustment process could be quite painful for the world economy," he said.
Mr. Greenspan's tenure as chairman of the Federal Reserve, which sets U.S. monetary policy, comes to an end January 31.