Alan Greenspan, the outgoing chairman of the US Federal Reserve, issued a strong warning about the danger from global economic imbalances in a speech yesterday that effectively marked his departure from the international arena after almost two decades as the world's most important central banker.
At a meeting of finance ministers of the Group of Seven (G7) rich nations, which was called specifically to celebrate Mr Greenspan's achievements, the 79-year-old said trade and budget deficits posed the greatest threat to the world economy.
He said: "If the pernicious drift toward fiscal instability in the United States and elsewhere is not arrested and is compounded by a protectionist reversal of globalisation, the adjustment process could be quite painful for the world economy."
Concerns over global imbalances and the need for a fresh deal on world trade will be top of the agenda for the meeting of the G7 in London that starts today. The meeting will focus on imbalances such as excess liquidity in global markets, record trade and current account deficits in the US, the moribund state of the European economy, and China's artificially low exchange rate with the dollar.
The US looks sure to keep up pressure on Beijing to let the yuan rise against the dollar to ease pressure on American exporters. But John Snow, the US Treasury Secretary, would not comment on a report that China would revalue by 7.2 per cent in the New Year. Beijing this year ended its decade-old rigid currency peg to the dollar.
On exchange rates generally, the G7 is unlikely to make any significant change to its traditional statement. Gordon Brown, the Chancellor of the Exchequer, indicated he would continue to push for greater transparency in oil markets to limit speculative surges in prices.
Mr Greenspan, who was appointed as head of the Fed just weeks before the Black Monday stock market crash in October 1997, will step down on 31 January 2006. He will be succeeded by Ben Bernanke, a former Fed member and chairman of the Council of Economics Advisers at the White House.
In the early part of his career, he continued the fight launched against inflation by his predecessor, Paul Volker. Towards the end of the 1990s, he was criticised for not hiking rates more sharply to curb the speculative "dot.com" boom. After the boom turned to bust and the US slipped into recession, he cut interest rates several times from 6.5 per cent to as low as 1 per cent. Since then, he taken rates back to 4.0 per cent.
Mr Brown, who chaired the meeting, paid fulsome tribute to Mr Greenspan, describing him as a "household name" across the globe. "His leadership of the world economy in the turbulent years of the late 1980s, the 1990s and the early years of this century is something not just the American people but the people of the whole world are very grateful for and would like to express their gratitude," he said.
Mr Greenspan was awarded the freedom of the City of London. He said the award was a "privilege", but joked that he was disappointed he could no longer avail himself of the Freeman's historic right to drive a flock of sheep over London Bridge.
The Chancellor presented Mr Greenspan with a red Budget box, a copy of the 1965 Stamp Act that triggered the War of Independence, an early edition of The Theory of Moral Sentiments by Adam Smith, and a hand-written record of a dividend paid by the Bank of England to George and Martha Washington for their share of a bond raised to keep British forces in America.Reuse content