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Greenspan Hypnotizes Himself

On the eve of the last G-7 meeting in London, US Federal Reserve Chairman Alan Greenspan did a startling about-face by soft-pedaling America’s trade deficit. “Market pressures …appear poised to stabilize and over the longer run possibly to decrease the US current-account deficit and its attendant financing requirements,” he said. But just two months earlier, in Frankfurt, Mr. Greenspan had cautioned that the US deficit could not go on forever without the dollar depreciating. What is going on here?

To be sure, the US trade figures have improved somewhat. The expected December trade deficit is $57 billion—an improvement on the record $60.3 billion gap in November. And the November figure will be adjusted downward because of a recently discovered statistical error by Canadian authorities.

But politics, not economics, explains why the Fed chairman changed his tune about America’s weak external position. Mr. Greenspan’s statement in Frankfurt in November alarmed senior European Central Bank (ECB) officials, who considered it a “provocation” – one that promptly sent the dollar into an unwanted tailspin.

The last thing the Fed Maestro needed was a repeat performance on the eve of the G-7 – a meeting that is supposed to exemplify international co-operation. So Mr. Greenspan decided to extend a peace offering to the Europeans.