- sees substantial risks due to global imbalances, risks that are not fully understood.
- is insistent that fiscal authorities need to regain control of the budget and says "Improving our fiscal position is the most effective means we have available to reduce our vulnerability during this prolonged period of adjustment."
- in equally insistent that fixed exchange rate regimes must allow more flexibility.
- worries that increases in demand growth in the foreign sector needed to offset a decline in U.S. consumption and increase in U.S. saving will have to overcome difficult political hurdles.
- says smooth adjustment requires, in addition to improved fiscal management, a strong and flexible financial system and open and free trade.
- says that avoiding protectionism calls for "improving educational opportunity and achievement in this country, and perhaps also in improving the design of the temporary assistance we provide individuals who bear the brunt of the adjustment costs than come with greater global economic integration."
Here's the speech:
U.S. and the Global Economy, by Timothy F. Geithner, President, New York Fed: I want to focus my remarks today on the imbalances in the world economy and their implications .... These imbalances... present challenges—and risks ... The sources of these imbalances are varied and complex. ... not anticipated and not fully understood. ... The magnitude and persistence of these imbalances seems to be the result of the interaction of two forces. The first involves a decline in U.S. savings relative to domestic investment, matched by an increase in savings relative to investment in parts of the rest of the world, principally in emerging Asia and the major oil exporters. ... The second feature ... has been an increase in the willingness of the rest of the world to invest its savings in the United States. ... This phenomenon is due in part to the perceived attractiveness of relative returns in the United States arising from the acceleration of productivity growth here, and in part due to the dynamics associated with exchange rate regimes linked in one way or another to the dollar. Together these forces have produced larger imbalances ... that have been sustained longer and financed more easily than conventional wisdom would have thought possible a decade or even five years ago. ...
This ... should concern us because it is not simply the result of the savings and investment decisions of the private sector. The fact that we are using a substantial part of the savings we are borrowing from the rest of the world to finance an unsustainable level of public borrowing leaves us more vulnerable than if those savings were being used for productive private investment. ... It should concern us because of how the imbalance has been financed. A substantial portion of the capital inflows ... has come from foreign central banks—which have been accumulating dollar reserves to preserve exchange rate arrangements that are unlikely to be sustainable and are already in the process of change... And ... these imbalances matter because at some point they will have to reverse. Market forces will at some point induce an adjustment. And that inevitable process of adjustment will bring with it the risk of ... slower growth in the United States and in the rest of the world. The magnitude of this risk is difficult to measure with any confidence. Past episodes of external adjustment offer some reassurance, but the present circumstances seem sufficiently different from historical precedent that history may not be a particularly useful guide. ... The risks associated with this adjustment process may be magnified ...[because the] average household in the United States today has a higher level of debt to income and is somewhat more exposed to interest rate risk than in the past. ... The adjustment process is also complicated by the fact that the rest of the world does not appear likely ... to be in a position to provide a sufficiently strong offsetting source of demand growth to compensate for the necessary slowing in U.S. domestic demand. ...
What can we do to mitigate these risks? For the United States, these challenges put a premium on putting in place a more credible fiscal policy framework, maintaining as strong and resilient a financial sector as possible, and preserving an open and flexible economy. ... Improving our fiscal position is the most effective means we have available to reduce our vulnerability during this prolonged period of adjustment. ... And even though substantial fiscal consolidation would not by itself bring the external imbalance down to a more sustainable level, it would improve the prospect for a smoother adjustment... The increase in the flexibility and resilience of the U.S. economy over the past two decades has a lot to do with the increased openness of the U.S. economy. ... We jeopardize future income gains if we are unable to sustain support ... a relatively open trade policy. How effective we are in meeting this political challenge is likely to depend significantly on how effective we are in improving educational opportunity and achievement in this country, and perhaps also in improving the design of the temporary assistance we provide individuals who bear the brunt of the adjustment costs than come with greater global economic integration. ... For global growth to be sustained at a reasonably strong pace during this period of adjustment, the desirable increase in U.S. savings ... would have to be complemented by stronger domestic demand growth outside the United States, absorbing a larger share of national savings. Exchange rate regimes, where they are currently closely tied to the dollar, will have to become more flexible, allowing exchange rates to adjust in response to changing fundamentals. ...
I've stated my views already, they are close to those of Geithner, so I won't repeat them again. Besides, from previous comments, I have the sense that many of you are tired of being told about the virtues of free trade and the efficiency gains of structural adjustment and would prefer that economists listen a little more and lecture a little less.