Bernanke: current account gap cannot persist

 @ibtimes
on September 11 2007 12:32 PM

Federal Reserve Chairman Ben Bernanke on Tuesday told a European audience that huge external debts were not unduly burdening the U.S. economy now, but that over time the U.S. current account gap is unsustainable.

The large U.S. current account deficit cannot persist indefinitely because the ability of the United States to make debt service payments and the willingness of foreigners to hold U.S. assets in their portfolios are both limited, he said in a speech at the Brandenburgische Akademie der Wissenschaften.

Bernanke did not discuss the outlook for the U.S. economy or interest rates in his speech.

The central bank head said that if U.S. current account deficits were to persist at current levels, foreign investors would eventually have enough of dollar assets. It would be difficult for the United States to finance its debt at a reasonable cost at that point, he said.

The global savings glut -- flows of capital from emerging economies into established economies, particularly the United States -- remains in place, Bernanke said.

As that glut dissipates, reducing the supply of financial capital from emerging economies, real interest rates should rise, he said.

In the meantime, economic growth in developed economies in recent years has raised demand for saving and contributed to rising real interest rates, he said. Term premiums have increased from low levels recently in part because of recent market volatility, he added.

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