CHICAGO (Reuters) - Continued globalization and innovation are helping reduce the dangers of a disruptive correction of the U.S. international trade imbalance, Fed Chairman Alan Greenspan said on Thursday."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," Greenspan said in prepared remarks to a banking conference sponsored by the Federal Reserve Bank of Chicago.
"Should globalization continue unfettered and thereby create an ever more flexible international financial system, history suggests that current account imbalances will be defused with modest risk of disruption," Greenspan said.
The current account deficit, the most comprehensive measure of the trade, stands at about 5 percent of the U.S. economy, a level many economists believe is not sustainable.
Greenspan acknowledged foreign investors will likely lose their appetite for U.S. 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.
But he said a decade-long transition to a "far more vigorous competitive world economy" appears to have stimulated global production and lessened the dangers of running a high trade gap.
"Protectionism, some signs of which have recently emerged, could significantly erode global flexibility and, hence, undermine the global adjustment process," Greenspan warned.
