Global Imbalances - Recent Developments and Prospects (Bernanke 2007)

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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. On the financial side, if U.S. current account deficits were to persist at near their current levels, foreign investors would ultimately become satiated with dollar assets, and financing the deficit at a reasonable cost would become difficult. Earlier reduction of global imbalances would reduce the potential strains associated with financing a large quantity of international liabilities and likely allow a smoother adjustment in financial markets. Finally, in the longer term, the developing world should be the recipient, not the provider, of financial capital. Because developing countries tend to have high ratios of labor to capital and to be away from the technological frontier, the potential returns to investment in those countries are high. Thus, capital flows toward those countries should benefit both them and the countries providing the capital. 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
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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.
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