|
 The
U.S. expansion appears on track. Europe and Japan may lack
exuberance, but their economies are at least on the plus side.
China and India -- with close to 40 percent of the world's
population -- have sustained growth at rates that not so long
ago would have seemed, if not impossible, highly improbable.
Yet,
under the placid surface, there are disturbing trends: huge
imbalances, disequilibria, risks -- call them what you will.
Altogether the circumstances seem to me as dangerous and
intractable as any I can remember, and I can remember quite a
lot. What really concerns me is that there seems to be so
little willingness or capacity to do much about it.
We
sit here absorbed in a debate about how to maintain Social
Security -- and, more important, Medicare -- when the baby
boomers retire. But right now, those same boomers are spending
like there's no tomorrow. If we can believe the numbers,
personal savings in the United States have practically
disappeared.
To
be sure, businesses have begun to rebuild their financial
reserves. But in the space of a few years, the federal deficit
has come to offset that source of national savings.
We
are buying a lot of housing at rising prices, but home
ownership has become a vehicle for borrowing as much as a
source of financial security. As a nation we are consuming and
investing about 6 percent more than we are producing.
What
holds it all together is a massive and growing flow of capital
from abroad, running to more than $2 billion every working
day, and growing. There is no sense of strain. As a nation we
don't consciously borrow or beg. We aren't even offering
attractive interest rates, nor do we have to offer our
creditors protection against the risk of a declining dollar.
Most
of the time, it has been private capital that has freely
flowed into our markets from abroad -- where better to invest
in an uncertain world, the refrain has gone, than the United
States?
More
recently, we've become more dependent on foreign central
banks, particularly in China and Japan and elsewhere in East
Asia.
It's
all quite comfortable for us. We fill our shops and our
garages with goods from abroad, and the competition has been a
powerful restraint on our internal prices. It's surely helped
keep interest rates exceptionally low despite our vanishing
savings and rapid growth.
And
it's comfortable for our trading partners and for those
supplying the capital. Some, such as China, depend heavily on
our expanding domestic markets. And for the most part, the
central banks of the emerging world have been willing to hold
more and more dollars, which are, after all, the closest thing
the world has to a truly international currency.
The
difficulty is that this seemingly comfortable pattern can't go
on indefinitely. I don't know of any country that has managed
to consume and invest 6 percent more than it produces for
long. The United States is absorbing about 80 percent of the
net flow of international capital. And at some point, both
central banks and private institutions will have their fill of
dollars.
I
don't know whether change will come with a bang or a whimper,
whether sooner or later. But as things stand, it is more
likely than not that it will be financial crises rather than
policy foresight that will force the change.
It's
not that it is so difficult intellectually to set out a
scenario for a "soft landing" and sustained growth.
There is a wide area of agreement among establishment
economists about a textbook pretty picture: China and other
continental Asian economies should permit and encourage a
substantial exchange rate appreciation against the dollar.
Japan and Europe should work promptly and aggressively toward
domestic stimulus and deal more effectively and speedily with
structural obstacles to growth. And the United States, by some
combination of measures, should forcibly increase its rate of
internal saving, thereby reducing its import demand.
But
can we, with any degree of confidence today, look forward to
any one of these policies being put in place any time soon,
much less a combination of all?
The
answer is no. So I think we are skating on increasingly thin
ice. On the present trajectory, the deficits and imbalances
will increase. At some point, the sense of confidence in
capital markets that today so benignly supports the flow of
funds to the United States and the growing world economy could
fade. Then some event, or combination of events, could come
along to disturb markets, with damaging volatility in both
exchange markets and interest rates. We had a taste of that in
the stagflation of the 1970s -- a volatile and depressed
dollar, inflationary pressures, a sudden increase in interest
rates and a couple of big recessions.
The
clear lesson I draw is that there is a high premium on doing
what we can to minimize the risks and to ensure that there is
time for orderly adjustment. I'm not suggesting anything
unorthodox or arcane. What is required is a willingness to act
now -- and next year, and the following year, and to act even
when, on the surface, everything seems so placid and
favorable.
What
I am talking about really boils down to the oldest lesson of
economic policy: a strong sense of monetary and fiscal
discipline. This is not a time for ideological intransigence
and partisan posturing on the budget at the expense of the
deficit rising still higher. Surely we would all be better off
if other countries did their part. But their failures must not
deflect us from what we can do, in our own self-interest.
A
wise observer of the economic scene once commented that
"what can be left to later, usually is -- and then, alas,
it's too late." I don't want to let that stand as the
epitaph of what has been an unparalleled period of success for
the American economy and of enormous potential for the world
at large.
The
writer was chairman of the Federal Reserve from 1979 to 1987.
This article is adapted from a speech in February at an
economic summit sponsored by the Stanford Institute for
Economic Policy Research. |
