'There's a Jewish story everywhere'
                                               

 Vol. 1, No. 136

Jews in Congress
This website regularly covers the activities of 43 members of the Jewish community currently serving in the Senate and the House of Representatives.  Here, by state, is a roster:

key:
Democrat
Republican
Independent


Arizona (1)
Rep. Gabrielle Giffords

California (10)
Sen. Barbara Boxer
Sen. Dianne Feinstein
Rep. Howard Berman
Rep. Susan Davis
Rep. Bob Filner
Rep. Jane Harman
Rep. Tom Lantos
Rep. Adam Schiff
Rep. Brad Sherman
Rep. Henry Waxman

Connecticut (1)
Sen. Joseph Lieberman

Florida (3)
Rep. Ron Klein
Rep. Debbie Wasserman Schultz
Rep. Robert Wexler

Illinois (2)
Rep. Rahm Emanuel
Rep. Jan Schakowsky

Kentucky (1)
Rep. John Yarmuth

Maryland (1)
Sen. Benjamin Cardin

Massachusetts (1)
^{Rep. Barney Frank}

Michigan (2)
Sen. Carl Levin
Rep. Sandy Levin

Minnesota (1)
Sen. Norm Coleman

Nevada (1)
Rep. Shelley Berkley

New Hampshire (1)
Rep. Paul Hodes

New Jersey (2)
Sen. Frank Lautenberg
Rep. Steve Rothman

New York (7)
Sen. Charles Schumer
Rep. Gary Ackerman
Rep. Eliot Engel
Rep. Steve Israel
Rep. Nita Lowey
Rep. Jerrold Nadler
Rep. Anthony Weiner

Oregon (1)
Sen. Ron Wyden


Pennsylvania (2)
Sen. Arlen Specter
Rep. Allyson Y. Schwartz


Tennessee (1)
Rep. Steve Cohen

Vermont (1)
Sen. Bernie Sanders

Virginia (1)
Rep. Eric Cantor

Wisconsin (3)
Sen. Russell Feingold
Sen. Herb Kohl
Rep. Steve Kagen

Additionally, we report on the activities of fellow members of our Jewish community at various levels of  government.  These include:

Federal government

White House: Josh Bolten, chief of staff

Joel Kaplan, dep. chief of staff for policy

Cabinet:
Homeland Security: Michael Chertoff

U.S.Trade Representative:
Susan Schwab

Federal Reserve Board: Ben Bernanke, chair

U.S. Supreme Court Justices
Ruth Bader Ginsburg
Stephen Breyer

State Governments
California: Insurance Commissioner Steve Poizner
New York Gov. Eliot Spitzer
Pennsylvania Gov. Ed Rendell

Big City Mayors:
Louisville, Kentucky: Jerry Abramson

New York, N.Y.: Michael Bloomberg

San Diego County
District Attorney Bonnie Dumanis
Sheriff Bill Kolender
Tax Assessor/ Recorder/ Clerk Greg Smith

 

 
Left: President Bush meets with speech writers (from left) Mark Thiessen, Bill McGurn and Christopher Michel to discuss a draft; at right he delivers to speech to a nationwide audience.  (White House photos by Eric Draper)

President Bush says 5,700 troops to come home from Iraq by the end of the year
 
WASHINGTON, DC (Press Release) —President Bush delivered a nationwide television address tonight on the war in Iraq.  A transcript follows:  

Good evening. In the life of all free nations, there come moments that decide the direction of a country and reveal the character of its people. We are now at such a moment.

Anbar province is a good example of how our strategy is working. Last year, an intelligence report concluded that Anbar had been lost to al Qaeda. Some cited this report as evidence that we had failed in Iraq and should cut our losses and pull out. Instead, we kept the pressure on the terrorists. The local people were suffering under the Taliban-like rule of al Qaeda, and they were sick of it. So they asked us for help. (jump to continuation)

Rice condemns assassination in Iraq of Sunni sheik allied with the U.S.

WASHINGTON, DC (Press Release)—U.S. Secretary of State Condoleezza Rice issued the following statement today:

"Today, Sheikh Abdul Sattar Bezia al-Rishawi, a courageous Iraqi leader committed to defeating extremism and improving the lives of the Iraqi people, was brutally murdered, along with several other innocent Iraqi citizens, near his farm in al-Anbar Province. Sheikh Sattar headed the Abu Risha tribe after the assassination of his father by al-Qaeda in 2004, and founded Sahawat al-Anbar, or Awakening Council, an alliance of 42 tribes pledged to fight al-Qaeda in Iraq.

"I extend my heartfelt condolences to his family and to the loved ones of those killed and injured. This act of terrorism can only be seen as an attempt to silence and intimidate those who are determined to build a peaceful, unified, and stable Iraq. The United States condemns such criminal acts and stands with the people of al-Anbar Province who have shown a firm determination to work against al-Qaeda and other extremists who seek to harm the Iraqi people and destabilize the country."

The preceding was provided by the U.S. State Department

Coleman 'encouraged' by Bush speech

WASHINGTON (Press Release)—U.S. Sen. Norm Coleman (Republican, Minnesota) issued the following statement after President Bush delivered his televised speech on Iraq:

"I’m encouraged by the progress our military is making under the leadership of General Petraeus. The confirmation this evening that we will see an initial troop reduction of 5,700 troops by year’s end and significant troop withdrawals numbering up to 30,000 or more by next summer is the right decision.

"While this is a positive development in the short-term, Americans need to know there is light at the end of the tunnel well beyond that time frame. That is why I pressed General Petraeus and Ambassador Crocker during their Senate testimony this week for a long-term plan that reflects the objectives of our shift in mission and assigns a military timeline for substantial troop reductions from a position of strength and success.

"Our military strategy must reflect the changing conditions on the ground, but we also have to continue to apply pressure to the Iraqis to accelerate political reconciliation. America’s role in Iraq is not unending, nor do they have a blank check. "

The preceding was provided by the office of Senator Norm Coleman


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The Jewish Grapevine

AROUND THE TOWN—Amnon Ben-Yehuda of San Diego earlier this year underwent prostate surgery  after thoroughly researching the alternatives.  Now his prognosis for beating the cancer is good, and he has shared his story, and research, on the web.  Here is a link.

● Chip Brent sent out Rosh Hashanah greetings for a "sweet year" accompanied by a photo of his wife, Dale's baklava.  Yum, this is great for Rosh Hashanah, but a photo you definitely don't want to look at during the Yom Kippur fast.



CYBER-REFERRALS—San Diego Jewish World appreciates and thanks those individuals and organizations which recommend or post stories of interest to the worldwide Jewish community:

● Jay Jacobson, ST. Louis Park, Minnesota: A commentary by Mohammad Yaghi for the Washington Institute for Near East Policy on the authoritarianism of the Hamas regime in Gaza.  Here is the link.

JEWS, GOVERNMENT and POLITICS—The Jewish community lends its support and leadership to a wide range of issues affecting the broad general community.  In this section of the column, compiled from news releases, we note some of those efforts:

● San Diego County Sheriff Bill Kolender is sending deputies and crime prevention specialists to Vista on Friday, September 14, to hand out educational brochures on best-ways to combat burglaries.  They also will conduct on-the-spot security inspections. "This is taking crime prevention to the people," Kolender commented. "We want to make it easy for anyone with questions or issues to make those known, and we'll do all we can to help them."
 

 
  Please click this ad to learn more about the Israel Guide Dog Center for the Blind

 

Greater San Diego County

 

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Business & Economy

House committee sets hearings on how homeowners can avoid foreclosure


WASHINGTON, D.C. (Press Release)— House Financial Services Committee Chairman Barney Frank today announced that the committee will hold a hearing on September 20,  entitled “Legislative and Regulatory Options for Minimizing and Mitigating Mortgage Foreclosures.” 

The hearing will examine the President’s recently announced plan to expand FHA programs and review other options for assisting homeowners at risk of foreclosure. 

Secretaries Henry Paulson and Alphonso Jackson, along with Federal Reserve Chairman Ben Bernanke, will discuss the President’s plan announced on August 31 and other initiatives. 

In addition, the committee will also hear from consumer advocates and industry representatives who will discuss other options aimed at helping homeowners avoid foreclosure during the current mortgage market issues. 

The preceding was provided by the office of U.S. Rep. Barney Frank

 

 

'Developing nations' nowadays are net providers of money to world capital markets

BERLIN (Press Release)—Federal Reserve Board Chairman Ben Bernanke delivered a lecture at the Bundesbank on Tuesday, September 11, about imbalances in the global economy.  Following is a transcript of his remarks.

In a speech given in March 2005 (Bernanke, 2005), I discussed a number of important and interrelated developments in the global economy, including the substantial expansion of the current account deficit in the United States, the equally impressive rise in the current account surpluses of many emerging-market economies, and a worldwide decline in long-term real interest rates.  I argued that these developments could be explained, in part, by the emergence of a global saving glut, driven by the transformation of many emerging-market economies--notably, rapidly growing East Asian economies and oil-producing countries--from net borrowers to large net lenders on international capital markets.  Today I will review those developments and provide an update.  I will also consider policy implications and prospects for the future.

A principal theme of my earlier remarks was that a satisfying explanation of the developments in the U.S. current account cannot focus on developments within the United States alone.  Rather, understanding these developments and evaluating potential policy responses require a global perspective.  I will continue to take that perspective in my remarks today and will emphasize in particular how changes in desired saving and investment in any given region, through their effects on global capital flows, may affect saving, investment, and the external balances of other countries around the world.

The Origins of the Global Saving Glut, 1996-2004
I will begin by reviewing the origins and development of the global saving glut over the period 1996-2004, as discussed in my earlier speech, and will then turn to more-recent developments.

As is well known, the U.S. current account deficit expanded sharply in the latter part of the 1990s and the first half of the present decade.  In 1996, the U.S. deficit was $125 billion, or 1.6 percent of U.S. gross domestic product (GDP); by 2004, it had grown to $640 billion, or 5.5 percent of GDP.¹  National income accounting identities imply that the current account deficit equals the excess of domestic investment in capital goods, including housing, over domestic saving, including the saving of households, firms, and governments.  The proximate cause of the increase in the U.S. external deficit was a decline in U.S. saving; between 1996 and 2004, the investment rate in the United States remained almost unchanged at about 19 percent of GDP, whereas the saving rate declined from 16-1/2 percent to slightly less than 14 percent of GDP.²  Domestic investment not funded by domestic saving must be financed by capital flows from abroad, and, indeed, the large increase in the U.S. current account deficit was matched by a similar expansion of net capital inflows.

Globally, national current account deficits and surpluses must balance out, as deficit countries can raise funds in international capital markets only to the extent that other (surplus) countries provide those funds.  Accordingly, it is not surprising that the widening of the U.S. current account deficit has been associated with increased current account surpluses in the rest of the world. 

What is surprising, however, in light of historical patterns, is that much of the increase in current account surpluses during this period took place in developing countries rather than in the industrial countries.³  The table shows current account balances for various countries and regions in selected years.  The aggregate current account balance of industrial countries other than the United States did increase between 1996 and 2004, by a bit less than $200 billion, much of that rise being accounted for by an increase in Japan's current account balance; the aggregate balance of the euro area rose only slightly.⁴  In comparison, the aggregate current account position of developing countries swung from a deficit of about $80 billion in 1996 to a surplus of roughly $300 billion in 2004, a net move toward surplus of $380 billion.

In the aggregate, the shift from deficit to surplus in the current account of the emerging-market world over this period largely reflected increased saving as a share of output rather than a decline in the rate of capital investment.  However, changes in saving and investment patterns varied by countries and regions.  For example, in the countries of developing Asia excluding China, most of the $150 billion swing toward external surplus between 1996 and 2004 was attributable to declines in domestic investment.  In China, rates of both saving and investment rose, but saving rates rose more, leading to an increase in that country's current account surplus of about $60 billion.

Outside of developing Asia, oil exporters in the Middle East and the former Soviet Union were also important contributors to the large increase in emerging-market current account balances.  The combined current accounts of the two regions increased from a surplus of $20 billion in 1996 to a surplus of $162 billion in 2004, an increase of about $140 billion.  This rise largely reflected higher saving rates, as domestic consumption fell behind the surge in oil revenues.  Among other emerging-market economies, higher saving also accounted for an increase in the aggregate current account balance of Latin America.  Of course, as emerging-market countries switched from being net borrowers to being net lenders, they began to pay down their international debts and to acquire assets of industrial countries.

I have noted the expansion of the U.S. current account deficit and the associated increases in current account surpluses abroad over the 1996-2004 period.  A third key development in that period was a sustained decline in long-term real interest rates in many parts of the world.  For example, the real yield on ten-year inflation-indexed U.S. Treasury securities averaged about 4 percent in 1999 but less than 2 percent in 2004.  The difference between the nominal long-term Treasury yield and the trailing twelve-month rate of consumer price inflation, another measure of the U.S. real interest rate, showed a similar pattern, falling from about 3.5 percent in 1996 to about 1.5 percent in 2004.  Similar movements were observed in other industrial countries:  In the United Kingdom, the real yields on inflation-indexed government bonds fell from an average of 3.6 percent in 1996 to just below 2 percent in 2004; in Canada, the analogous figures were 4.6 percent in 1996 and 2.3 percent in 2004.  Real interest rates measured as the difference between government bond yields and consumer inflation also fell in Germany, Sweden, and Switzerland.  However, in Japan, real interest rates remained low throughout the period.

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.  Or, in textbook terms, did the fall in the realized saving rate in the United States reflect a shift in the demand for savings at any given interest rate (a shift in the saving schedule) or a decline in savings induced by a change in the interest rate (a movement along the saving schedule)? 

In fact, there is no obvious reason why the desired saving rate in the United States should have fallen precipitously over the 1996-2004 period.⁵  Indeed, the federal budget deficit, an oft-cited source of the decline in U.S. saving, was actually in surplus during the 1998-2001 period even as the current account deficit was widening.  Moreover, a downward shift in the U.S. desired saving rate, all else being equal, should have led to greater pressure on economic resources and thus to increases, not decreases, in real interest rates.  As I will discuss later, from a normative viewpoint, we have good reasons to believe that the U.S. saving rate should be higher than it is.  Nonetheless, domestic factors alone do not seem to account for the large deterioration in the U.S. external balance.

In my earlier speech, I put forth an alternative explanation that is consistent with each of the three basic facts I listed earlier.  That explanation takes as a key driving force a large increase in net desired saving (that is, desired saving less desired domestic investment) in emerging-market and oil-producing economies, a change that transformed these countries from modest net demanders to substantial net suppliers of funds to international capital markets.  This large increase in the net supply of financial capital from sources outside the industrial countries is what, in my earlier remarks, I called the global saving glut.

To interpret the rise in net saving in emerging-market countries as causal, we need to identify factors in those countries that may have caused their desired saving to rise, or their desired investment to fall, or both.  In fact, several factors appear to have contributed to the increase in the supply of net saving from emerging-market countries.  First, the financial crises that hit many Asian economies in the 1990s led to significant declines in investment in those countries (in part because of reduced confidence in domestic financial institutions) and to changes in policies--including a resistance to currency appreciation, the determined accumulation of foreign exchange reserves, and fiscal consolidation--that had the effect of promoting current account surpluses.  Second, sharp increases in crude oil prices boosted oil exporters' incomes by more than those countries were able or willing to increase spending, thereby leading to higher saving and current account surpluses.  Finally, Chinese saving rates rose rapidly (by more even than investment rates); that rise in saving was, perhaps, a result of the strong growth in incomes in the midst of an underdeveloped financial sector and a weak social safety net that increases the motivation for precautionary saving.

The combined effect of these developments, I argued, raised desired saving relative to desired investment in the emerging markets, which in turn led to current account surpluses in those countries.  But for the world as a whole, total saving must equal investment, and the sum of national current account balances must be zero.  Accordingly, in the industrial economies, realized saving rates had to fall relative to investment, and current account deficits had to emerge as counterparts to the developing countries' surpluses.  This adjustment could be achieved only by declines in real interest rates (as well as increases in asset prices, as we observed.  The effects were particularly large in the United States, perhaps because high productivity growth and deep capital markets in that country were particularly attractive to foreign capital.  The global saving glut hypothesis is thus consistent with the three key facts I noted earlier.

To be sure, the global saving glut was not the only factor behind the decline in long-term real interest rates since the 1990s.  As I described in subsequent remarks (Bernanke, 2006), term premiums also declined during this period for reasons that are debated but may have included a perceived reduction in uncertainty regarding inflation and the real economy as well as increased demand for longer-term securities by various institutional investors, including pension funds and foreign central banks.  Changes in the global pattern of saving and investment surely played an important role in the decline in long-term rates, however.

Recent Developments
I turn now to a review of developments since I last spoke on these issues two and a half years ago.  In brief, external imbalances have become wider since 2004.  Both the geographical pattern of these imbalances and their sources in terms of saving and investment rates have changed a bit.  Nevertheless, the broad configuration that developed after 1996 still seems to be in place today.

As the table shows, 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 from about 19 percent of GDP in 2004 to 20 percent of GDP in 2006.  The U.S. national saving rate did not change significantly over that period.

Meanwhile, the aggregate current account surplus of emerging-market economies expanded about $350 billion, from $297 billion in 2004 to $643 billion in 2006; almost all the increase was attributable to a higher aggregate rate of saving.  A significant portion of this further growth is due to China, whose current account surplus swelled an additional $180 billion, rising from 3.6 percent of national output in 2004 to 9.4 percent in 2006.  The increase in the Chinese surplus can be attributed primarily to an increase in the saving rate between 2004 and 2006.  The increase in China's saving rate could, in part, be a consequence of the rapid pace of growth in the country.  That is, with income growing very rapidly, but with consumer credit not readily available and precautionary motives for saving remaining strong, consumption is failing to catch up.⁶  Also contributing to high saving rates was the authorities' decision to limit currency appreciation, thereby restraining import demand and boosting exports.

Oil exporters have also contributed significantly to the recent increase in the aggregate current account balance of developing countries.  The combined current account balance of the countries of the Middle East and the former Soviet Union (which include a number of large oil exporters) rose about $150 billion between 2004 and 2006.  Again, the increase is almost entirely reflected in higher saving rates, as the oil exporters continue to save a large portion of the increased revenue resulting from higher oil prices. 

In contrast to the situation in emerging markets, the aggregate current account surplus for industrial countries other than the United States declined recently, from almost $350 billion in 2004 to about $200 billion in 2006; most of the decline reflected a sharp drop in the euro-area balance.  Thus, unlike in the 1996-2004 period, industrial countries other than the United States have absorbed part of the increase in the net supply of capital coming from the emerging-market economies.  In aggregate, the recent decline in the current account balances of non-U.S. industrial economies reflects an increase in investment rates; saving rates have generally remained little changed.⁷  In short, in the emerging markets, realized saving and current account surpluses have increased since 2004.  In the industrial countries, over the same period, current accounts have moved further into deficit, primarily because of higher realized rates of investment.

What about real interest rates?  Since I discussed these issues in March 2005, real interest rates have reversed some of their previous declines.  For example, in the United States, real yields on inflation-indexed government debt averaged 2.3 percent in 2006 as compared with 1.85 percent in 2004.  In the past few weeks, that yield has averaged about 2.4 percent.  Inflation-adjusted yields in other industrial countries have also started to move back up after falling in 2005.⁸      

How does this all fit together?  My reading of recent developments is that although some of the details have changed, the fundamental elements of the global saving glut remain in place.  Most important, the emerging-market countries and oil producers remain large net suppliers of financial capital to global markets.  The mix of suppliers of funds and the factors motivating that supply have changed a bit:  China and the oil exporters account for a larger share of the developing countries' aggregate surplus, and developing Asia excluding China accounts for somewhat less.  Also, the further expansion of the region's net supply of saving in the past two years appears to reflect primarily an increase in desired saving by the emerging-market countries, whereas the previous increase in net saving also involved some decline in desired investment in East Asia after the financial crises of the 1990s.  Exchange rate policies in Asia have also influenced desired saving in that region.

Further increases in net capital flows from the developing economies, all else being equal, should have further depressed real interest rates around the world.  But as I have noted, in the past few years, real interest rates have moved up a bit.  This increase does not imply that the global saving glut has dissipated.  However, it does suggest that, at the margin, desired investment net of desired saving must have risen in the industrial countries enough to offset any increase in desired saving by emerging-market countries.  This characterization is certainly consistent with the pickup in investment rates in the industrial countries, which I noted earlier, and it is also consistent, more generally, with the recovery of domestic demand growth in Europe, Japan, and other parts of the industrial world.  In summary, economic growth over the past few years, especially in industrial countries, has apparently been sufficient to increase the net demand for saving and thus to raise global real interest rates somewhat.

Once again, however, I do not want to rely exclusively on this line of explanation for the behavior of long-term real interest rates, as other factors have no doubt been relevant.  In particular, term premiums appear recently to have risen from what may have been unsustainably low levels, in part because of the greater recent volatility in financial markets and investors' demands for increased compensation for risk-taking.

Are Current Account Imbalances a Problem?
This analysis of the sources of global imbalances does not address the critical normative question:  Are the current account imbalances that we see today a problem?  Not everyone would agree that they are, for several reasons. 

First, these external imbalances are to a significant extent a market phenomenon and, in the case of the U.S. deficit, reflect the attractiveness of both the U.S. economy overall and the depth, liquidity, and legal safeguards associated with its capital markets.⁹  Of course, some foreign governments have intervened in foreign exchange markets and invested the proceeds in U.S. and other capital markets, which most likely has led to greater imbalances than would otherwise exist.  But the supply of capital from foreign governments is not as large as that from foreign private investors.  From 1998 through 2001, even as the U.S. current account deficit widened substantially, official capital flows into the United States were quite small.  During the years 2002 through 2006, net official capital inflows picked up substantially but still corresponded to less than half (47 percent) of the U.S. current account deficit over the period.  On a gross basis, during the same period, private foreign inflows were three times official capital flows.¹⁰  Moreover, even public investors are motivated to some extent by the attractions of the U.S. economy and U.S. capital markets.

Second, current account imbalances can help reduce tendencies toward recession, on the one hand, or overheating and inflation, on the other.¹¹  During the late 1990s, for example, the developing Asian economies that had experienced financial crises and consequent collapses in domestic investment benefited from being able to run trade surpluses, which helped strengthen aggregate demand and employment.  During that same period, the trade deficits run by the United States allowed domestic demand to grow strongly without creating significant inflationary pressures.  Until a few years ago, the euro area was growing slowly and thus also benefited from running trade surpluses; more recently, as domestic demand in Europe has recovered, the trade surplus has declined.

Third, 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.  As a fraction of net household wealth, which totaled almost $56 trillion in 2006, the negative NIIP is even smaller--less than 5 percent.  Moreover, the U.S. investment income balance, which essentially represents the debt service on the NIIP, remains positive, at least for now.  Thus, even after years of current account deficits and corresponding increases in net liabilities, the United States continues to earn more on its foreign investments than it pays on its foreign liabilities.  And, as best we can tell, the share of U.S. assets in foreign portfolios does not seem excessive relative to the importance of the United States in the global economy.

All that said, the current pattern of external imbalances--the export of capital from the developing countries to the industrial economies, particularly the United States--may prove counterproductive over the longer term.  I noted some reasons for concern in my earlier speech, and they remain relevant today.

First, the United States and other industrial economies face the prospect of aging populations and of workforces that are growing more slowly.  These trends enhance the need to save (to support future retirees) and may reduce incentives to invest (because workforces eventually will shrink).  If the United States saved more, one likely outcome would be a reduction in the U.S. current account deficit and in the rate at which the country is adding to its liabilities to the rest of the world.

Second, the large U.S. current account deficit cannot persist indefinitely because 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 must eventually take place, and the process of adjustment will have both real and financial consequences.  For example, in the United States, the growth of export-oriented sectors such as manufacturing has been restrained by the shifts in relative prices and foreign demand associated with the U.S. trade deficit.  Ultimately, the 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.  The greater the needed adjustment, the more potentially disruptive and costly these shifts may be.  Similarly, external 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. 

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 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.
 

Current Account Balances
(Billions of U.S. dollars)

Country or region	1996	2000	2004	2005	2006
Industrial	31.1	-304.7	-296.5	-502.5	-607.3
United States	-124.8	-417.4	-640.2	-754.8	-811.5
Japan	65.7	119.6	172.1	165.7	170.4
Euro area 1	77.3	-37.0	115.0	22.2	-11.1
France	23.4	22.3	10.5	-19.5	-28.3
Germany	-14.0	-32.6	118.0	128.4	146.4
Italy	36.8	-6.2	-15.5	-28.4	-41.6
Spain	-1.4	-23.1	-54.9	-83.0	-108.0
Other	12.9	30.0	56.6	64.4	45.0
Australia	-15.4	-14.9	-38.5	-41.2	-40.9
Canada	3.4	19.7	21.3	26.3	21.5
Switzerland	22.0	30.7	50.4	61.4	69.8
United Kingdom	-10.5	-37.6	-35.4	-53.7	-88.3
Memo:         Industrial excl.         United States	155.9	112.7	343.7	252.3	204.2
Developing	-82.8	124.7	296.5	507.9	643.2
Asia	-40.2	77.0	172.4	245.1	352.1
China	7.2	20.5	68.7	160.8	249.9
Hong Kong	-4.0	7.0	15.7	20.3	20.6
Korea	-23.1	12.3	28.2	15.0	6.1
Taiwan	10.9	8.9	18.5	16.0	24.7
Thailand	-14.4	9.3	2.8	-7.9	3.2
Latin America	-39.1	-48.1	20.4	34.6	48.7
Argentina	-6.8	-9.0	3.2	3.5	5.2
Brazil	-23.5	-24.2	11.7	14.2	13.6
Mexico	-2.5	-18.7	-6.7	-4.9	-1.5
Middle East	15.1	72.1	99.2	189.0	212.4
Africa	-5.2	7.2	0.6	14.6	19.9
Eastern Europe	-18.5	-31.8	-58.6	-63.2	-88.9
Former Soviet Union	5.2	48.3	62.6	87.7	99.0
Memo:         Developing Asia         excl. China	-47.4	56.5	103.7	84.3	102.2
Statistical discrepancy	-51.6	-180.0	0.0	5.4	35.9

1. Calculated as the sum of the balances of the thirteen euro-area countries. Return to table

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.

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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.

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Footnotes

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

2.  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. Return to text

3.  I am using the terms "emerging-market" and "developing" interchangeably. Return to text

4.  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. Return to text

5.  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. Return to text

6.  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. Return to text

7.  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. Return to text

8.  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. Return to text

9.  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).   Return to text

10.  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. Return to text

11.  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. Return to text
 

{Marc Kligman, who combines being a sports agent with his life as an observant Jew, invites you to listen. Click on the ad above for more information}

 

Story continuations

Bush-Iraq...
(Continued from above)

To take advantage of this opportunity, I sent an additional 4,000 Marines to Anbar as part of the surge. Together, local sheiks, Iraqi forces, and coalition troops drove the terrorists from the capital of Ramadi and other population centers. Today, a city where al Qaeda once planted its flag is beginning to return to normal. Anbar citizens who once feared beheading for talking to an American or Iraqi soldier now come forward to tell us where the terrorists are hiding. Young Sunnis who once joined the insurgency are now joining the army and police. And with the help of our provincial reconstruction teams, new jobs are being created and local governments are meeting again.

These developments do not often make the headlines, but they do make a difference. During my visit to Anbar on Labor Day, local Sunni leaders thanked me for America's support. They pledged they would never allow al Qaeda to return. And they told me they now see a place for their people in a democratic Iraq. The Sunni governor of Anbar province put it this way: "Our tomorrow starts today."

The changes in Anbar show all Iraqis what becomes possible when extremists are driven out. They show al Qaeda that it cannot count on popular support, even in a province its leaders once declared their home base. And they show the world that ordinary people in the Middle East want the same things for their children that we want for ours -- a decent life and a peaceful future.

In Anbar, the enemy remains active and deadly. Earlier today, one of the brave tribal sheikhs who helped lead the revolt against al Qaeda was murdered. In response, a fellow Sunni leader declared: "We are determined to strike back and continue our work." And as they do, they can count on the continued support of the United States.

Throughout Iraq, too many citizens are being killed by terrorists and death squads. And for most Iraqis, the quality of life is far from where it should be. Yet General Petraeus and Ambassador Crocker report that the success in Anbar is beginning to be replicated in other parts of the country.

One year ago, much of Baghdad was under siege. Schools were closed, markets were shuttered, and sectarian violence was spiraling out of control. Today, most of Baghdad's neighborhoods are being patrolled by coalition and Iraqi forces who live among the people they protect. Many schools and markets are reopening. Citizens are coming forward with vital intelligence. Sectarian killings are down. And ordinary life is beginning to return.

One year ago, much of Diyala province was a sanctuary for al Qaeda and other extremist groups, and its capital of Baqubah was emerging as an al Qaeda stronghold. Today, Baqubah is cleared. Diyala province is the site of a growing popular uprising against the extremists. And some local tribes are working alongside coalition and Iraqi forces to clear out the enemy and reclaim their communities.

One year ago, Shia extremists and Iranian-backed militants were gaining strength and targeting Sunnis for assassination. Today, these groups are being broken up, and many of their leaders are being captured or killed.

These gains are a tribute to our military, they are a tribute to the courage of the Iraqi security forces, and they are the tribute to an Iraqi government that has decided to take on the extremists.

Now the Iraqi government must bring the same determination to achieving reconciliation. This is an enormous undertaking after more than three decades of tyranny and division. The government has not met its own legislative benchmarks -- and in my meetings with Iraqi leaders, I have made it clear that they must.

Yet Iraq's national leaders are getting some things done. For example, they have passed a budget. They're sharing oil revenues with the provinces. They're allowing former Baathists to rejoin Iraq's military or receive government pensions. Local reconciliation is taking place. The key now is to link this progress in the provinces to progress in Baghdad. As local politics change, so will national politics.

Our troops in Iraq are performing brilliantly. Along with Iraqi forces, they have captured or killed an average of more than 1,500 enemy fighters per month since January. Yet ultimately, the way forward depends on the ability of Iraqis to maintain security gains. According to General Petraeus and a panel chaired by retired General Jim Jones, the Iraqi army is becoming more capable -- although there is still a great deal of work to be done to improve the national police. Iraqi forces are receiving increased cooperation from local populations. And this is improving their ability to hold areas that have been cleared.

Because of this success, General Petraeus believes we have now reached the point where we can maintain our security gains with fewer American forces. He has recommended that we not replace about 2,200 Marines scheduled to leave Anbar province later this month. In addition, he says it will soon be possible to bring home an Army combat brigade, for a total force reduction of 5,700 troops by Christmas. And he expects that by July, we will be able to reduce our troop levels in Iraq from 20 combat brigades to 15.

General Petraeus also recommends that in December we begin transitioning to the next phase of our strategy in Iraq. As terrorists are defeated, civil society takes root, and the Iraqis assume more control over their own security, our mission in Iraq will evolve. Over time, our troops will shift from leading operations, to partnering with Iraqi forces, and eventually to overwatching those forces. As this transition in our mission takes place, our troops will focus on a more limited set of tasks, including counterterrorism operations and training, equipping, and supporting Iraqi forces.

I have consulted with the Joint Chiefs of Staff, other members of my national security team, Iraqi officials, and leaders of both parties in Congress. I have benefited from their advice, and I have accepted General Petraeus's recommendations. I have directed General Petraeus and Ambassador Crocker to update their joint campaign plan for Iraq, so we can adjust our military and civilian resources accordingly. I have also directed them to deliver another report to Congress in March. At that time, they will provide a fresh assessment of the situation in Iraq and of the troop levels and resources we need to meet our national security objectives.

The principle guiding my decisions on troop levels in Iraq is "return on success." The more successful we are, the more American troops can return home. And in all we do, I will ensure that our commanders on the ground have the troops and flexibility they need to defeat the enemy.

Americans want our country to be safe and our troops to begin coming home from Iraq. Yet those of us who believe success in Iraq is essential to our security, and those who believe we should begin bringing our troops home, have been at odds. Now, because of the measure of success we are seeing in Iraq, we can begin seeing troops come home. The way forward I have described tonight makes it possible, for the first time in years, for people who have been on opposite sides of this difficult debate to come together.

This vision for a reduced American presence also has the support of Iraqi leaders from all communities. At the same time, they understand that their success will require U.S. political, economic, and security engagement that extends beyond my presidency. These Iraqi leaders have asked for an enduring relationship with America. And we are ready to begin building that relationship -- in a way that protects our interests in the region and requires many fewer American troops.

The success of a free Iraq is critical to the security of the United States. A free Iraq will deny al Qaeda a safe haven. A free Iraq will counter the destructive ambitions of Iran. A free Iraq will marginalize extremists, unleash the talent of its people, and be an anchor of stability in the region. A free Iraq will set an example for people across the Middle East. A free Iraq will be our partner in the fight against terror -- and that will make us safer here at home.

Realizing this vision will be difficult, but it is achievable. Our military commanders believe we can succeed. Our diplomats believe we can succeed. And for the safety of future generations of Americans, we must succeed.

If we were to be driven out of Iraq, extremists of all strains would be emboldened. Al Qaeda could gain new recruits and new sanctuaries. Iran would benefit from the chaos and would be encouraged in its efforts to gain nuclear weapons and dominate the region. Extremists could control a key part of the global energy supply. Iraq could face a humanitarian nightmare. Democracy movements would be violently reversed. We would leave our children to face a far more dangerous world. And as we saw on September the 11th, 2001, those dangers can reach our cities and kill our people.

Whatever political party you belong to, whatever your position on Iraq, we should be able to agree that America has a vital interest in preventing chaos and providing hope in the Middle East. We should be able to agree that we must defeat al Qaeda, counter Iran, help the Afghan government, work for peace in the Holy Land, and strengthen our military so we can prevail in the struggle against terrorists and extremists.

So tonight I want to speak to members of the United States Congress: Let us come together on a policy of strength in the Middle East. I thank you for providing crucial funds and resources for our military. And I ask you to join me in supporting the recommendations General Petraeus has made and the troop levels he has asked for.

To the Iraqi people: You have voted for freedom, and now you are liberating your country from terrorists and death squads. You must demand that your leaders make the tough choices needed to achieve reconciliation. As you do, have confidence that America does not abandon our friends, and we will not abandon you.

To Iraq's neighbors who seek peace: The violent extremists who target Iraq are also targeting you. The best way to secure your interests and protect your own people is to stand with the people of Iraq. That means using your economic and diplomatic leverage to strengthen the government in Baghdad. And it means the efforts by Iran and Syria to undermine that government must end.

To the international community: The success of a free Iraq matters to every civilized nation. We thank the 36 nations who have troops on the ground in Iraq and the many others who are helping that young democracy. We encourage all nations to help, by implementing the International Compact to revitalize Iraq's economy, by participating in the Neighbors Conferences to boost cooperation and overcome differences in the region, and by supporting the new and expanded mission of the United Nations in Iraq.

To our military personnel, intelligence officers, diplomats, and civilians on the front lines in Iraq: You have done everything America has asked of you. And the progress I have reported tonight is in large part because of your courage and hard effort. You are serving far from home. Our nation is grateful for your sacrifices, and the sacrifices of your families.

Earlier this year, I received an email from the family of Army Specialist Brandon Stout of Michigan. Brandon volunteered for the National Guard and was killed while serving in Baghdad. His family has suffered greatly. Yet in their sorrow, they see larger purpose. His wife, Audrey, says that Brandon felt called to serve and knew what he was fighting for. And his parents, Tracy and Jeff, wrote me this: "We believe this is a war of good and evil and we must win even if it cost the life of our own son. Freedom is not free."

This country is blessed to have Americans like Brandon Stout, who make extraordinary sacrifices to keep us safe from harm. They are doing so in a fight that is just, and right, and necessary. And now it falls to us to finish the work they have begun.

Some say the gains we are making in Iraq come too late. They are mistaken. It is never too late to deal a blow to al Qaeda. It is never too late to advance freedom. And it is never too late to support our troops in a fight they can win.

Good night, and God bless America.