Trade protectionism and a rising US budget deficit both pose risks to the economic recovery, Federal Reserve Chairman Alan Greenspan said on Thursday.
"Protectionism, some signs of which have recently emerged, could significantly erode global flexibility and, hence, undermine the global adjustment process," Greenspan said in a speech delivered by satellite to a Chicago Federal Reserve banking conference.
"We may not be able to usefully determine at what point foreign accumulation of net claims on the United States will slow or even reverse, but is evident that the greater the degree of international flexibility, the less the risk of crisis," he said.
Greenspan said if the increase in global trade ties progressed without interference, imbalances in the current account - the broadest measure of trade since it includes investment flows - appeared likely to be corrected with only a "modest" chance of disruption.
During later questions from audience members, the Fed chief said the long-standing process of "creative destruction" was behind a shift in jobs to cheaper offshore markets. And while this was often painful for individuals, it also was responsible for raising global standards of living.
He said the United States - where the movement of jobs to low-wage countries like China and India has become a hot election issue - had profited more than most of the world from the expansion of international trade.
"This is part of a process in which jobs are growing and standards of living are growing and if we impede the process we are going to find ourselves in very serious difficulty," he said.
The Fed chairman repeated early assurances that US household balance sheets were in good shape and downplayed the risk of a housing bubble fuelled by decades-low lending rates.
Government debt, he added, was more worrisome.
"Our fiscal prospects are, in my judgement, a significant obstacle to long-term stability because the budget deficit is not readily subject to correction by market forces that stabilise other imbalances," Greenspan said.
He acknowledged foreign investors will likely lose their appetite for US assets eventually.
"At some point ... international investors, private and official, faced with a concentration of dollar assets in their portfolios, will seek diversification, irrespective of the competitive returns on dollar assets," Greenspan said.
Of the domestic economy, the Fed chief said while house prices were not in danger of imploding, they would suffer some impact from a rise in interest rates.
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