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Speech  continued

Chairman Ben S. Bernanke

At the Bundesbank Lecture, Berlin, Germany

September 11, 2007

Global Imbalances: Recent Developments and Prospects

Prospects for Reducing External Imbalances
What are the prospects for a gradual and orderly rebalancing of spending and external accounts around the world?  The brief answer is that signs of progress have appeared but that most countries have only just begun to undertake the policy changes that will ultimately be needed.

Recently, the pickup in economic growth outside the United States, together with changes in the real exchange rate and other relative prices, has assisted the process of current account adjustment.  Notably, during 2006, foreign growth helped U.S. real exports of goods and services grow 9.3 percent, and exports of capital goods rose 10.8 percent.  Some of the gain in foreign growth is cyclical, but some is due to economic reforms (in both industrial and non-industrial countries) and thus may be more persistent.  Overall, we have seen some modest indications of improvement in the U.S. external balance recently.  For example, the non-oil trade deficit has declined modestly, from 3.7 percent of U.S. GDP in 2004 to 3.5 percent of GDP in 2006.  In addition, in 2006, net exports made a positive contribution to U.S. real GDP growth, the first year that had happened since 1995.  Net exports also contributed to U.S. growth in the first half of 2007.

As is well known, however, further progress on the U.S. current account seems unlikely without significant increases in public and private saving in the United States.  The U.S. federal budget deficit has declined recently and is officially projected to improve further over the next few years.  Unfortunately, as I have noted, the United States has already reached the leading edge of major demographic changes that will result in an older population and a more slowly growing workforce.  A major effort to increase public and private saving is needed to prepare for the economic consequences of this demographic transition and to address external imbalances.

As the global perspective makes clear, the reduction of the U.S. current account deficit also requires efforts on the part of the surplus countries to reduce the excess of their desired saving over desired investment.  Over the longer term, the current account surpluses of the emerging-market countries seem likely to narrow as domestic spending catches up with income.  Economic policies in these countries can assist this process.  For example, the oil exporters have collectively saved much of the windfall arising from higher crude prices in recent years; they should spend more in the future to develop and diversify their domestic economies.  China has officially recognized the need to increase its domestic spending and scale back its reliance on exports.  Measures that could help achieve these goals include further reforms of the financial sector; increased government spending on infrastructure, environmental improvement, and the social safety net; and currency appreciation.  In East Asia excluding China, continued efforts to strengthen and deepen the banking sector and financial markets would help domestic investment recover from the lingering effects of the financial crises of the 1990s.  In each of these cases, the indicated policies would reduce global imbalances.  Moreover, as with U.S. saving efforts, these actions would convey important economic benefits to the countries undertaking them even if current account balances were not an issue.

What implications would a gradual rebalancing have for long-term real interest rates?  The logic of the global saving glut suggests that, as the glut dissipates over the next few decades and thereby reduces the net supply of financial capital from emerging-market countries, real interest rates should rise--a tendency that seems likely to be only partly offset by increased saving in the industrial countries.  However, factors other than the saving-investment balance affect long-term interest rates, including the relative supplies of, and demands for, long-term securities and changes in the required compensation for the risk embedded in term premiums.  Moreover, distant one-year forward interest rates remain low, an indication that markets currently do not expect much change in the global balance of desired saving and investment or that they expect the effects of such a change to be offset by other developments.  Accordingly, we are again reminded of the need to maintain appropriate humility in forecasting returns and asset prices.

Calculated as the sum of the balances of the thirteen euro-area countries.

Source: For the United States, Department of Commerce, Bureau of Economic Analysis.  For some countries other than the United States, national sources; for most countries, however, International Monetary Fund (IMF), World Economic Outlook Database , April 2007 (www.imf.org/external/pubs/ft/weo/2007/01/data/index.aspx); some values for 2006 are IMF estimates.

References

Bernanke, Ben S. (2005).  " The Global Saving Glut and the U.S. Current Account Deficit," speech delivered for the Sandridge Lecture at the Virginia Association of Economists, Richmond, March 10, www.federalreserve.gov/boarddocs/speeches/2005/200503102/default.htm.  Similar remarks with updated data were presented for the Homer Jones Lecture, St. Louis, April 14, 2005, www.federalreserve.gov/boarddocs/speeches/2005/20050414/default.htm. 

------------ (2006).  " Reflections on the Yield Curve and Monetary Policy," speech delivered at the Economic Club of New York, New York, March 20, www.federalreserve.gov/newsevents/speech/bernanke20060320a.htm.

Caballero, Ricardo J., Emmanuel Farhi, and Pierre-Olivier Gourinchas (2006).  "An Equilibrium Model of 'Global Imbalances' and Low Interest Rates ," NBER Working Paper Series 11996.  Cambridge, Mass.:  National Bureau of Economic Research, January, www.nber.org/papers/w11996.pdf.

Mendoza, Enrique G., Vincenzo Quadrini, and Jose-Victor Rios-Rull (2007).  "Financial Integration, Financial Deepness, and Global Imbalances ," NBER Working Paper Series 12909.  Cambridge, Mass.:  National Bureau of Economic Research, February, www.nber.org/papers/w12909.pdf.

Footnotes

The shift was almost wholly attributable to a similar expansion of the trade deficit.  The balance on investment income actually improved over the period. 

More precisely, investment grew from 19.0 percent to 19.3 percent of GDP, and saving declined from 16.5 percent to 13.8 percent of GDP, for a net change in investment less saving of 3.0 percent of GDP.  As implied by data noted earlier in this paragraph, the net change in the U.S. current account deficit over the same period was 3.9 percent of GDP.  In principle, the change in the excess of investment over saving and the change in the current account deficit should be the same.  The difference between the two figures is accounted for by statistical discrepancies, both within the national income and product accounts (NIPA) and between the balance of payments definitions and NIPA definitions of certain international transactions. 

I am using the terms "emerging-market" and "developing" interchangeably. 

As shown in the table, the surplus of industrial countries other than the United States increased from about $150 billion to nearly $350 billion over the period, and the Japanese external balance rose from $66 billion to $172 billion.  The increase in the Japanese current account balance as a share of GDP, from 1.4 percent to 3.7 percent, occurred despite a substantial fall in the GDP share of the saving rate, from 30.4 percent to 26.8 percent, as the GDP share of the investment rate fell even more dramatically, from 28.9 percent to 23.0 percent.  For the euro area as a whole, the current account balance remained at about 1 percent of GDP between 1996 and 2004, as aggregate investment and saving ratios remained largely unchanged.  Within the euro area, Germany's current account balance increased almost 5 percentage points of GDP--from -0.6 percent in 1996 to 4.3 percent in 2004--as saving moved up and investment decreased.  However, this development was offset by declines in the balances of some other euro-area countries, including France, Italy, and Spain; the decreases were mostly associated with higher investment rates.  Data on saving, investment, and current account balances for countries other than the United States are drawn primarily from the International Monetary Fund, World Economic Outlook Database , April 2007 (www.imf.org/external/pubs/ft/weo/2007/01/data/index.aspx); in some cases, data are drawn from national sources. 

During the first part of the period, the rise in U.S. productivity and higher stock prices likely contributed to the U.S. current account deficit by increasing desired investment and reducing desired saving.  However, some of the increase in stock prices may have been the endogenous result of factors discussed later, and in any case the effects of the stock market on investment dissipated by 2004.  Finally, as noted in the text, if the driving force behind the changes in external balances was a decline in desired saving in the United States, world real interest rates would have risen rather than fallen. 

The combined current account balance of developing Asia excluding China narrowed a bit as a share of GDP between 2004 and 2006, as the investment rate edged up while the saving rate was little changed.  Nevertheless, investment rates in this region still remain substantially below their 1996 levels. 

The combined current account balance for the euro area moved from a surplus of $115 billion in 2004 to a deficit of about $10 billion in 2006, largely because of an increase in the aggregate investment rate.  Large declines in the balances of France, Italy, and Spain more than offset a higher surplus in the balance of Germany.  For the euro area as a whole, the movement into deficit has largely reflected an increase in the euro-area investment rate from about 20 percent of GDP in 2004 to about 21 percent of GDP in 2006.  Japan's current account surplus was almost unchanged at around $170 billion in both 2004 and 2006, as an increase in the rate of investment was matched by a higher saving rate. 

Inflation-adjusted bonds in the United Kingdom had a yield of 2.19 percent, on average, in July 2007 as compared with a yield of 1.65 percent, on average, in July 2005.  In Canada, yields on inflation-adjusted bonds moved from 1.76 percent in July 2005 to 2.18 percent in July 2007.  Real interest rates, calculated as government bond yields minus twelve-month inflation rates, have also moved up since 2005 in Germany, Sweden, and Switzerland. 

An interesting vein of recent research suggests that one of the reasons that developing countries seek to run current account surpluses is to finance the acquisition of high-quality assets they cannot produce in their own economies.  Refer to Caballero, Farhi, and Gourinchas (2006) and Mendoza, Quadrini, and Rios-Rull (2007).   

During 2002-06, gross foreign official inflows totaled $1,491 billion; net official inflows were only slightly less, as U.S. official outflows were negligible.  Private foreign inflows net of private U.S. outflows totaled $1,659 billion during the same period; gross foreign private inflows were $4,697 billion. 

Another way to make this point is that current account balances and surpluses give countries the flexibility to spend more or less than their current output, as dictated by economic conditions and needs. 

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