## Global Imbalances Handout

### A Possible Peak in Global Imbalances?

Large Audio File

Fed Chair Ben Bernanke said yesterday:

Ben Bernanke:

• In sum, considering the 1996-2004 period, we have three facts to explain: (1) the substantial increase in the U.S. current account deficit, (2) the swing from moderate deficits to large surpluses in emerging-market countries, and (3) the significant decline in long-term real interest rates. Many observers have focused on the expansion of the U.S. current account deficit in isolation and have argued that it is due largely to domestic factors, particularly declines in both public and private saving rates. But accounting identities assure us that any movement in the current account must involve changes in realized saving rates relative to investment rates. The question at issue, therefore, is whether the decline in the realized saving rate in the United States reflected a decline in desired saving or was instead a response to other, possibly external, economic developments...
• The U.S. current account deficit has widened further in the past two years, from $640 billion in 2004 (5.5 percent of GDP) to$812 billion in 2006 (6.2 percent of GDP), although it fell a bit in the first quarter of this year, to \$770 billion at an annual rate. In an accounting sense, the increase in the U.S. deficit over this period reflects primarily an increase in the investment rate...
• Although the U.S. current account deficit is certainly not sustainable at its current level, U.S. liabilities to foreigners are not, at this point, putting an exceptionally large burden on the American economy. The net international investment position (NIIP) of the United States, although at a substantial negative 19 percent of GDP, is still smaller than the negative NIIP of several other industrial economies...
• 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. Adjustment... will have both real and financial consequences.... [T]he necessary reduction in the trade and current account deficits will entail shifting resources out of sectors producing nontraded goods and services to those producing tradables.... [E]xternal adjustment for China and other surplus countries will involve shifting resources out of the export sector and into industries geared toward meeting domestic consumption needs; that necessary shift, too, will likely be less disruptive if it occurs earlier and thus less rapidly and on a smaller scale...