what is worrying greenspan?

DUNCAN:
What's Worrying The Chairman?
http://www.gold-eagle.com/editorials_05/mauldin062205.html

Extract:
"If the US current account deficit continues to expand from its level of $666 billion in 2004, as seems likely so long as the dollar remains at existing exchange rates, then the amount of paper dollars that foreign central banks wish to invest in US government debt will continue to expand.

Meanwhile, the US budget deficit is widely expected to be lower in FY2005 (approximately $370 billion) than in FY2004 when it was $413 billion. That means that the government will issue less new debt this year than it did last year.

Presumably, the same will be true of Fannie Mae and Freddie Mac, in light of the accounting scandals in which they have become embroiled. Under such circumstances, there will not be enough new government and agency debt issued to satisfy the demand of foreign central banks.

Consequently, they are likely to buy existing debt instead, which will have the effect of pushing up the price of those bonds and driving their yields down even further...regardless of what the Fed does to the Federal Funds rate.

Mortgage rates are determined by the yield on 10 year treasury bonds in the United States. Therefore, if foreign central bank buying drives down the yield on treasury bonds, it will also push down mortgage rates, which in turn will cause the rate of increase in US property prices, already the fastest in 25 years during 2004 (and the fastest ever in real, inflation- adjusted terms), to accelerate still further.

Higher property prices will allow yet more equity extraction which, in turn, will stimulate US consumption further.

Additional consumption will pull in more imports and exacerbate the US current account deficit. And, a larger current account deficit will put yet more dollars in the hands of foreign central banks, who, then, will look for still more dollar-denominated assets in which to invest them.

At the same time, rising house prices and booming consumption will lift US tax revenues, causing the US budget deficit to shrink much more than currently expected".

In other words, if the US current account continues widening faster than the US budget deficit, it could drive down yields on government bonds and therefore the interest rates on mortgages so low that it creates an asst bubble in the United States that the Fed could not control"