The G7 meeting of finance ministers is on, and Chairman Greenspan weighs in early with his view on U.S. trade imbalances and the value of the dollar. From BBC News:
Federal Reserve chairman Alan Greenspan says the US is on track to stabilise and even reduce its trade deficit.
He highlighted the US government's growing willingness to curb spending and a rise in US household savings as factors which will help reduce it...
"The voice of fiscal restraint, barely audible a year ago, has at least partially regained volume," he said in a keynote speech.
Furthermore:
Mr Greenspan went on to reiterate what he has said so often; that the "US current account deficit cannot widen forever".
"Fortunately, the increased flexibility of the American economy will likely facilitate any adjustment without significant consequences to aggregate economic activity."
The risks, according to Mr. Greenspan's comments, are in the inflation outlook. From the TimesOnline (UK):
But he also sounded a warning over the possibility of US inflation, triggered by a further fall in the dollar, which could force the Fed to raise interest rates more sharply...
He said foreign businesses may become less willing to cut export prices to offset higher exchange rates. If overseas exporters raised prices, higher US inflation could result. “We may be approaching a point, if we are not already there, at which exporters to the US . . . would no longer choose to absorb a further reduction in profit margins,” he said.
There you have it.
UPDATE: Brad Setser (here) and Nouriel Roubini (here) are not thrilled.