Greenspan on Offshoring, Deficit, Globalization, Innovation

Food for thought:


http://www.federalreserve.gov/board...062/default.htm


Remarks by Chairman Alan Greenspan
Globalization and innovation
At the Conference on Bank Structure and Competition, sponsored by the
Federal Reserve Bank of Chicago, Chicago, Illinois
(via satellite)
May 6, 2004

The United States economy appears to have been pressing a number of
historic limits in recent years without experiencing the types of
financial disruption that almost surely would have arisen in decades
past. This observation raises some key questions about the longer-term
stability of the U.S. and global economies that bear significantly on
future economic developments, including the future competitive shape of
banking.

Among the limits we have been pressing against are those in our external
and budget balances. We in the UnitedStates have been incurring ever
larger trade deficits, with the broader current account measure having
reached 5 percent of our gross domestic product (GDP). Yet the dollar's
real exchange value, despite its recent decline, remains close to its
average of the past two decades. Meanwhile, we have lurched from a
budget surplus in 2000 to a deficit that is projected by the
Congressional Budget Office to be 4-1/4 percent of GDP this year. In
addition, we have legislated commitments to our senior citizens that,
given the inevitable retirement of our huge baby-boom generation, will
create significant fiscal challenges in the years ahead. Yet the yield
on Treasury notes maturing a decade from now remain at low levels. Nor
are we experiencing inordinate household financial pressures as a
consequence of record high household debt as a percent of income.

* * *

Has something fundamental happened to the U.S. economy and, by
extension, U.S. banking, that enables us to disregard all the
time-tested criteria of imbalance and economic danger? Regrettably, the
answer is no. The free lunch has still to be invented. We do, however,
seem to be undergoing what is likely, in the end, to be a one-time shift
in the degree of globalization and innovation that has temporarily
altered the specific calibrations of those criteria. Recent evidence is
consistent with such a hypothesis of a transitional economic paradigm, a
paradigm somewhat different from that which fit much of our earlier
post-World War II experience.

* * *

Globalization has altered the economic frameworks of both advanced and
developing nations in ways that are difficult to fully comprehend.
Nonetheless, the largely unregulated global markets, with some notable
exceptions, appear to move effortlessly from one state of equilibrium to
another. Adam Smith's "invisible hand" remains at work on a global scale.

Because of a lowering of trade barriers, deregulation, and increased
innovation, cross-border trade in recent decades has been expanding at a
far faster pace than GDP. As a result, domestic economies are
increasingly exposed to the rigors of international competition and
comparative advantage. In the process, lower prices for some goods and
services produced by our trading partners have competitively suppressed
domestic price pressures.

Production of traded goods has expanded rapidly in economies with large,
low-wage labor forces. Most prominent are China and India, which over
the past decade have partly opened up to market capitalism, and the
economies of central and eastern Europe that were freed from central
planning by the fall of the Soviet empire. The consequent significant
additions to world production and trade have clearly put downward
pressure on domestic prices, though somewhat less so over the past year.
Moreover, the pronounced fall in inflation, virtually worldwide, over
the past two decades has doubtless been a key factor in the notable
decline in world economic volatility.

In tandem with increasing globalization, monetary policy, to most
observers, has become increasingly effective in achieving the objective
of price stability. But because we have not experienced a sufficient
number of economic turning points to judge the causal linkages among
increased globalization, improved monetary policy, significant
disinflation, and greater economic stability, the structure of the
transitional paradigm is necessarily sketchy.

Nonetheless, a paradigm encompassing globalization and innovation, far
more than in earlier decades, appears to explain the events of the past
ten years better than other conceptual constructs. If this is indeed the
case, because there are limits to how far globalization and the speed of
innovation can proceed, the current apparent rapid pace of structural
shift cannot continue indefinitely. A couple of ws ago, I indicated
in testimony to the Congress that the outlook for the next year or two
has materially brightened. But the outlook for the latter part of this
decade remains opaque because it is uncertain whether this transitional
paradigm, if that is what it is, is already far advanced and about to
slow, or whether it remains in an early, still vibrant stage of evolution.

* * *

Globalization--the extension of the division of labor and specialization
beyond national borders--is patently a key to understanding much of our
recent economic history. With a deepening of specialization and a
growing population free to take risks over a widening area, production
has become increasingly international.[1]

The pronounced structural shift over the past decade to a far more
vigorous competitive world economy than that which existed in earlier
postwar decades apparently has been adding significant stimulus to world
economic activity. That stimulus, like that which resulted from similar
structural changes in the past, is likely a function of the rate of
increase of globalization and not its level. If so, such impetus would
tend to peter out, as we approach the practical limits of globalization.

Full globalization, in which trade and finance are driven solely by
risk-adjusted rates of return and risk is indifferent to distance and
national borders, will likely never be achieved. The inherent risk
aversion of people, and the home bias implied by that aversion, will
limit how far globalization can proceed. But because so much of our
recent experience has little precedent, as I noted earlier, we cannot
fully determine how long the current globalization dynamic will take to
play out.

* * *

The increasing globalization of the post-war world was fostered at its
beginnings by the judgment that burgeoning prewar protectionism was
among the primary causes of the depth of the Great Depression of the
1930s. As a consequence, trade barriers began to fall after the war.
Globalization was enhanced further when the inflation-ridden 1970s
provoked a rethinking of the philosophy of economic policy, the roots of
which were still planted in the Depression era. In the United States,
that rethinking led to a wave of bipartisan deregulation of
transportation, energy, and finance. At the same time, there was a
growing recognition that inflation impaired economic performance.
Indeed, Group of Seven world leaders at their 1977 Economic Summit
identified inflation as a cause of unemployment. Moreover, monetary
policy tightening, and not increased regulation, came to be seen by the
end of that decade as the only viable solution to taming inflation[2].
Of course, the startling recovery of war-ravaged West Germany following
Ludwig Erhard's postwar reforms, and Japan's embrace of global trade,
were early examples of the policy reevaluation process.

It has taken several decades of experience with markets and competition
to foster an unwinding of regulatory rigidities. Today, privatization
and deregulation have become almost synonymous with "reform."

* * *

By any number of measures, globalization has expanded markedly in recent
decades. Not only has the ratio of international trade in goods and
services to world GDP risen inexorably over the past half-century, but a
related measure--the extent to which savers reach beyond their national
borders to invest in foreign assets--has also risen.

Through much of the post-World War II years, domestic saving for each
country was invested predominantly in its domestic capital assets,
irrespective of the potential for superior risk-adjusted returns to be
available from abroad. Because a country's domestic saving less its
domestic investment is equal to its current account balance, such
balances, positive or negative, with the exception of the mid-1980s,
were therefore generally modest. But in the early 1990s, "home bias"
began to diminish appreciably,[3] and, hence, the dispersion of current
account balances among countries has increased markedly. The widening
current account deficit in the United States has come to dominate the
tail of that distribution of external balances across countries.

Thus, the decline in home bias, or its equivalent, expanding
globalization, has apparently enabled the United States to finance and,
hence, incur so large a current account deficit. As a result of these
capital flows, the ratio of foreign net claims against U.S. residents to
our annual GDP has risen to approximately one-fourth. While some other
countries are far more in debt to foreigners, at least relative to their
GDPs, they do not face the scale of international financing that we require.

A U.S. current account deficit of 5 percent or more of GDP would
probably not have been readily fundable a half-century ago or perhaps
even a couple of decades ago.[4] The ability to move that much of world
saving to the United States in response to relative rates of return
almost surely would have been hindered by the far-lesser degree of both
globalization and international financial flexibility that existed at
the time. Such large transfers would presumably have induced changes in
the prices of assets that would have proved inhibiting.

Nonetheless, we have little evidence that the economic forces that are
fostering international specialization, and hence cross-border trade and
increasing dispersion of current account balances, are as yet
diminishing. At some point, however, international investors, private
and official, faced with a concentration of dollar assets in their
portfolios, will s diversification, irrespective of the competitive
returns on dollar assets. That shift, over time, would likely induce
contractions in both the U.S. current account deficit and the
corresponding current account surpluses of other nations.

Can market forces incrementally defuse a buildup in a nation's current
account deficit and net external debt before a crisis more abruptly does
so? The answer seems to lie with the degree of market flexibility. In a
world economy that is sufficiently flexible, as debt projections rise,
product and equity prices, interest rates, and exchange rates presumably
would change to reestablish global balance.[5]

We may not be able to usefully determine at what point foreign
accumulation of net claims on the United States will slow or even
reverse, but it is evident that the greater the degree of international
flexibility, the less the risk of a crisis.[6]

Should globalization continue unfettered and thereby create an ever more
flexible international financial system, history suggests that current
account imbalances will be defused with modest risk of disruption. A
Federal Reserve study of large current account adjustments in developed
countries,[7] the results of which are presumably applicable to the
United States, suggests that market forces are likely to restore a more
long-term sustainable current account balance here without measurable
disruption. Indeed, this was the case in the second half of the 1980s.

I say this with one major caveat. Protectionism, some signs of which
have recently emerged, could significantly erode global flexibility and,
hence, undermine the global adjustment process. We are already
experiencing pressure to slow down the expansion of trade. The current
Doha Round of trade negotiations is in some difficulty owing largely to
the fact that the low-hanging fruit of trade negotiation has already
been picked in the trade liberalizations that have occurred since the
Kennedy Round.

* * *

Augmenting the dramatic effect of increased globalization on economic
growth, and perhaps at some times, fostering it, have been the
remarkable technological advances of recent decades. In particular,
information and communication technologies have propelled the processing
and transmission of data and ideas to a level far beyond our
capabilities of a decade or two ago.

The advent of real-time information systems has enabled managers to
organize a workforce without the redundancy required in earlier decades
to ensure against the type of human error that technology has now made
far less prevalent. Real-time information, by eliminating much human
intervention, has markedly reduced scrappage rates on production lines,
lead times on purchases, and errors in all forms of recordkeeping. Much
data transfer is now electronic and far more accurate than possible in
earlier times.

The long-term path of technology and growth is difficult to discern.
Indeed, innovation, by definition, is not forecastable. Nonetheless, the
overall pace of productivity growth that has recently been near 5
percent at an annual rate is highly likely to slow because we have
rarely exceeded 3 percent for any protracted period. In the United
States, we have always employed technologies at, or close to, the
cutting edge, and we have created much of our innovative technologies
ourselves. The opportunities of many developing economies to borrow
innovation is not readily available to us. Thus, even though the
longer-term prospects for innovation and respectable productivity growth
are encouraging, some near-term slowing in the pace of advance to a rate
closer to productivity's long-term average seems likely.

* * *

We have, I believe, a reasonably good understanding of why Americans
have been able to reach farther into global markets, incur significant
increases in debt, and yet fail to produce the disruptions so often
observed as a consequence. However, a widely held alternative view of
the past decade cannot readily be dismissed. That view holds that the
postwar paradigm is still largely in place, and key financial ratios,
rather than suggesting a moving structure, reflect extreme values of a
fixed structure that must eventually adjust, perhaps abruptly.

To be sure, even with the increased flexibility implied in a paradigm of
expanding globalization and innovation, the combination of exceptionally
low saving rates and historically high ratios of household debt to
income can be a concern if incomes unexpectedly fall. Indeed, there is
little doubt that virtually any debt burden becomes oppressive if
incomes fall significantly.

But rising debt-to-income ratios can be somewhat misleading as an
indicator of stress. Indeed the ratio of household debt to income has
been rising sporadically for more than a half-century, a trend that
partly reflects the increased capacity of ever-wealthier households to
service debt. Moreover, a significant part of the recent rise in the
debt-to-income ratio also reflects the remarkable gain in homeownership.
Over the past decade, for example, the share of households that owns
homes has risen from 64 percent to 69 percent. During the decade a
significant number of renters bought homes, thus increasing the asset
side of their balance sheets as well as increasing their debt. It can
scarcely be argued that the substitutions of debt service for rent
materially impaired the financial state of the new homeowner. Yet the
process over the past decade added more than 10 percent to outstanding
mortgage debt and accounted for more than one-seventh of the increase in
total household debt over that period.[8]

Thus, short of a period of overall economic weakness, households, with
the exception of some highly leveraged subprime borrowers, do not appear
to be faced with significant financial strain. With interest rates low,
debt service costs for households are average, or only marginally higher
than average. Adding other fixed charges such as rent, utilities, and
auto-leasing costs does not materially alter the change in the degree of
burden.

Even should interest rates rise materially further, the effect on
household expenses will be stretched out because four-fifths of debt is
fixed rate of varying maturities, and it will take time for debt to
mature and reflect the higher rates. Despite the almost two percentage
point rise in mortgage rates on new originations from mid-1999 to
mid-2000, the average interest rate on outstanding mortgage debt rose
only slightly, as did debt service.

In a related concern, a number of analysts have conjectured that the
extended period of low interest rates is spawning a bubble in housing
prices in the United States that will, at some point, implode. Their
concern is that, if this were to occur, highly leveraged homeowners will
be forced to sharply curtail their spending. To be sure, indexes of
house prices based on repeat sales of existing homes have outstripped
increases in rents, suggesting at least the possibility of price
misalignment in some housing markets. A softening in housing markets
would likely be one of many adjustments that would occur in the wake of
an increase in interest rates.

But a destabilizing contraction in nationwide house prices does not seem
the most probable outcome. Indeed, nominal house prices in the aggregate
have rarely fallen and certainly not by very much.

Still, house prices, like those of many other assets, are difficult to
predict, and movements in those prices can be of macroeconomic
significance. Moreover, because these transactions often involve
considerable leverage, they need to be monitored by those responsible
for fostering financial stability.

There appears, at the moment, to be little concern about corporate
financial imbalances. Debt-to-equity ratios are well within historical
ranges, and the recent prolonged period of low long-term interest rates
has enabled corporations to fund short-term liabilities and stretch out
bond maturities. Even the relatively narrow spreads on
below-investment-grade corporate debt appear to reflect low expected
losses rather than an especially small aversion to risk.

The resolution of our current account deficit and household debt burdens
does not strike me as overly worrisome, but that is certainly not the
case for our yawning fiscal deficit. Our fiscal prospects are, in my
judgment, a significant obstacle to long-term stability because the
budget deficit is not readily subject to correction by market forces
that stabilize other imbalances.

One issue that concerns most analysts, especially in the context of a
widening structural federal deficit, is inadequate national saving.
Fortunately, our meager domestic savings, and those attracted from
abroad, are being very effectively invested in domestic capital assets.
The efficiency of our capital stock thus has been an important offset to
what, by any standard, has been an exceptionally low domestic saving
rate in the United States. Although saving is a necessary condition for
financing the capital investment required to engender productivity, it
is not a sufficient condition. The very high saving rates of the Soviet
Union, of China, and of India in earlier decades, often did not foster
significant productivity growth in those countries. Saving squandered in
financing inefficient technologies does not advance living standards. It
is thus difficult to judge how significant a problem our relatively low
gross domestic saving rate is to the future growth of an efficient
capital stock. The high productivity growth rate of the past decade does
not suggest a problem. But our success in attracting savings from abroad
may be masking the full effect of deficient domestic saving.

* * *

Our day-by-day experiences with the effectiveness of flexible markets as
they adjust to, and correct, imbalances can readily lead us to the
conclusion that once markets are purged of rigidities, macroeconomic
disturbances will become a historical relic. However, the penchant of
humans for quirky, often irrational, behavior gets in the way of this
conclusion. A discontinuity in valuation judgments, often the cause or
consequence of a building and bursting of a bubble, can occasionally
destabilize even the most liquid and flexible of markets. I do not have
much to add on this issue except to reiterate our need to better
understand it.

* * *

The last three decades have witnessed a significant coalescing of
economic policy philosophies. Central planning has been judged as
ineffective and is now generally avoided. Market flexibility has become
the focus, albeit often hesitant focus, of reform in most countries. All
policymakers are struggling to understand global and technological
changes that appear to have profoundly altered world economic
developments. For most economic participants, these changes appear to
have had positive effects on their economic well-being. But a
significant minority, trapped on the adverse side of creative
destruction, are suffering. This is an issue that needs to be addressed
if globalization is to sustain the necessary public support.

* * *

The competitive state of banking, the subject of this conference, will
be significantly affected by the path of global financial and
technological innovations. In my judgment, this will be among the most
significant developments affecting banking in the next decades.

Footnotes

1. Much of what is assembled in final salable form in the United States,
for example, may consist of components from many continents. Companies
s out the lowest costs of inputs to effectively compete for their
customers' dollars. This international competition left unfettered,
history suggests, would tend to direct output to the most efficient
producers of specific products or services and, hence, maximize
standards of living of all participants in trade. Given the skills and
education of its workforce and a number of institutional factors, such
as its legal structure, each economy will achieve its maximum possible
average living standard.

2. This had not always been the case. For example, wage and price
controls were imposed in the United States in 1971 as a substitute for a
tighter monetary policy and higher interest rates to address rising
inflation.

3. The correlation coefficient between paired domestic saving and
domestic investment, a conventional measure of the propensity to invest
at home for OECD countries constituting four-fifths of world GDP, fell
from 0.96 in 1992 to less than 0.8 in 2002. With rare exceptions, a
decline in the correlation of countries' paired domestic investment to
domestic saving implies an increased dispersion of current account balances.

4. It is true that estimates of the ratios of the current account to GDP
for many countries in the nineteenth century are estimated to have been
as large as, or larger, than we have experienced in recent years.
However, the substantial net flows of capital financing for those
earlier deficits were likely motivated in large part by specific major
development projects (for example, railroads) bearing high expected
rates of return. By contrast, diversification appears to be a more
salient motivation for today's large net capital flows. Moreover, gross
capital flows are believed to be considerably greater relative to GDP in
recent years than in the nineteenth century. (See Alan M. ;Taylor, "A
Century of Current Account Dynamics," Journal of International Money and
Finance, 2002, pp. 725-48, and Maurice Obstfeld and Alan M. Taylor,
"Globalization and Capital Markets," NBER Working Paper 8846, March 2002.)

5. The experience over the past two centuries of trade and finance among
the individual states that make up the United States comes close to that
paradigm of flexibility, even though exchange rates among the states
have been fixed. Although we have scant data on cross-border
transactions among the separate states, anecdotal evidence suggests that
over the decades significant apparent imbalances have been resolved
without precipitating interstate balance-of-payments crises. The
dispersion of unemployment rates among the states, one measure of
imbalances, spikes during periods of economic stress but rapidly returns
to modest levels, a pattern reflecting a high degree of adjustment
flexibility. That flexibility is even more apparent in regional money
markets, where interest rates that presumably reflect differential
imbalances in states' current accounts and hence cross-border borrowing
requirements have, in recent years, exhibited very little interstate
dispersion. This observation suggests either negligible
cross-state-border imbalances, an unlikely occurrence given the pattern
of state unemployment dispersion, or more likely very rapid financial
adjustments.

6. Although increased flexibility apparently promotes resolution of
current account imbalances without significant disruption, it may also
allow larger deficits to emerge before markets are required to address
them. Moreover, the apparent ability of the U.S. economy to withstand
the stock market plunge of 2000, the terrorist attacks of 9/11,
corporate governance scandals, and wars in Afghanistan and Iraq
indicates a greater degree of economic flexibility than was apparent in
the 1970s and earlier.

7. Caroline Freund, "Current Account Adjustment in Industrialized
Countries," Board of Governors of the Federal Reserve System,
International Finance Discussion Paper No. 692, December 2000.

8. For statistical methodology see Karen Dynan, Kathleen Johnson, and
Karen Pence, "Recent Changes to a Measure of U.S. Household Debt
Service," Federal Reserve Bulletin, vol. 89 (October 2003), pp. 417-26.



--
The incapacity of a weak and distracted government may
often assume the appearance, and produce the effects,
of a treasonable correspondence with the public enemy.
--Gibbon, "Decline and Fall of the Roman Empire"

The man need to get his nose out of his text book and
come visit the real world.
As hypotheses, any idea or thought can be expounded
upon.  The numbers might look real good when balanced
on an international relativity, with a swing from the
bottom, third world economy, to our US economy, and
then taking a median slice out of the linear portion of the
curve, and calling this the norm...

I really don't look forward to my standard of living
being reduced to the international median,  and that
is exactly what the future outcome will be on the present
course that our country is traveling.
Greenspan is not making any mention of it, but for the future, the planning
is to follow something of the Indian
caste system.  and all the benefits that might be reaped
by internationalist thinking and society, will not really
trickle down to the middle class, or the working people...

Before the doors close, might be a good time to become
a member of your Masonic lodge, or a member of some
other international societal organization, and be accepted
into their inner circle.

Pablito
 ****************************************
*

"Tiny Human Ferret" <ixnayamspay_klaatu@earthops.net> wrote in message
news:409A474D.2060906@earthops.net...
>
> Food for thought:
>
>
>
http://www.federalreserve.gov/board...062/default.htm
>
>
>   Remarks by Chairman Alan Greenspan
> Globalization and innovation
> At the Conference on Bank Structure and Competition, sponsored by the
> Federal Reserve Bank of Chicago, Chicago, Illinois
> (via satellite)
> May 6, 2004
>
> The United States economy appears to have been pressing a number of
> historic limits in recent years without experiencing the types of
> financial disruption that almost surely would have arisen in decades
> past. This observation raises some key questions about the longer-term
> stability of the U.S. and global economies that bear significantly on
> future economic developments, including the future competitive shape of
> banking.
>
> Among the limits we have been pressing against are those in our external
> and budget balances. We in the UnitedStates have been incurring ever
> larger trade deficits, with the broader current account measure having
> reached 5 percent of our gross domestic product (GDP). Yet the dollar's
> real exchange value, despite its recent decline, remains close to its
> average of the past two decades. Meanwhile, we have lurched from a
> budget surplus in 2000 to a deficit that is projected by the
> Congressional Budget Office to be 4-1/4 percent of GDP this year. In
> addition, we have legislated commitments to our senior citizens that,
> given the inevitable retirement of our huge baby-boom generation, will
> create significant fiscal challenges in the years ahead. Yet the yield
> on Treasury notes maturing a decade from now remain at low levels. Nor
> are we experiencing inordinate household financial pressures as a
> consequence of record high household debt as a percent of income.
>
> * * *
>
> Has something fundamental happened to the U.S. economy and, by
> extension, U.S. banking, that enables us to disregard all the
> time-tested criteria of imbalance and economic danger? Regrettably, the
> answer is no. The free lunch has still to be invented. We do, however,
> seem to be undergoing what is likely, in the end, to be a one-time shift
> in the degree of globalization and innovation that has temporarily
> altered the specific calibrations of those criteria. Recent evidence is
> consistent with such a hypothesis of a transitional economic paradigm, a
> paradigm somewhat different from that which fit much of our earlier
> post-World War II experience.
>
> * * *
>
> Globalization has altered the economic frameworks of both advanced and
> developing nations in ways that are difficult to fully comprehend.
> Nonetheless, the largely unregulated global markets, with some notable
> exceptions, appear to move effortlessly from one state of equilibrium to
> another. Adam Smith's "invisible hand" remains at work on a global scale.
>
> Because of a lowering of trade barriers, deregulation, and increased
> innovation, cross-border trade in recent decades has been expanding at a
> far faster pace than GDP. As a result, domestic economies are
> increasingly exposed to the rigors of international competition and
> comparative advantage. In the process, lower prices for some goods and
> services produced by our trading partners have competitively suppressed
> domestic price pressures.
>
> Production of traded goods has expanded rapidly in economies with large,
> low-wage labor forces. Most prominent are China and India, which over
> the past decade have partly opened up to market capitalism, and the
> economies of central and eastern Europe that were freed from central
> planning by the fall of the Soviet empire. The consequent significant
> additions to world production and trade have clearly put downward
> pressure on domestic prices, though somewhat less so over the past year.
> Moreover, the pronounced fall in inflation, virtually worldwide, over
> the past two decades has doubtless been a key factor in the notable
> decline in world economic volatility.
>
> In tandem with increasing globalization, monetary policy, to most
> observers, has become increasingly effective in achieving the objective
> of price stability. But because we have not experienced a sufficient
> number of economic turning points to judge the causal linkages among
> increased globalization, improved monetary policy, significant
> disinflation, and greater economic stability, the structure of the
> transitional paradigm is necessarily sketchy.
>
> Nonetheless, a paradigm encompassing globalization and innovation, far
> more than in earlier decades, appears to explain the events of the past
> ten years better than other conceptual constructs. If this is indeed the
> case, because there are limits to how far globalization and the speed of
> innovation can proceed, the current apparent rapid pace of structural
> shift cannot continue indefinitely. A couple of ws ago, I indicated
> in testimony to the Congress that the outlook for the next year or two
> has materially brightened. But the outlook for the latter part of this
> decade remains opaque because it is uncertain whether this transitional
> paradigm, if that is what it is, is already far advanced and about to
> slow, or whether it remains in an early, still vibrant stage of evolution.
>
> * * *
>
> Globalization--the extension of the division of labor and specialization
> beyond national borders--is patently a key to understanding much of our
> recent economic history. With a deepening of specialization and a
> growing population free to take risks over a widening area, production
> has become increasingly international.[1]
>
> The pronounced structural shift over the past decade to a far more
> vigorous competitive world economy than that which existed in earlier
> postwar decades apparently has been adding significant stimulus to world
> economic activity. That stimulus, like that which resulted from similar
> structural changes in the past, is likely a function of the rate of
> increase of globalization and not its level. If so, such impetus would
> tend to peter out, as we approach the practical limits of globalization.
>
> Full globalization, in which trade and finance are driven solely by
> risk-adjusted rates of return and risk is indifferent to distance and
> national borders, will likely never be achieved. The inherent risk
> aversion of people, and the home bias implied by that aversion, will
> limit how far globalization can proceed. But because so much of our
> recent experience has little precedent, as I noted earlier, we cannot
> fully determine how long the current globalization dynamic will take to
> play out.
>
> * * *
>
> The increasing globalization of the post-war world was fostered at its
> beginnings by the judgment that burgeoning prewar protectionism was
> among the primary causes of the depth of the Great Depression of the
> 1930s. As a consequence, trade barriers began to fall after the war.
> Globalization was enhanced further when the inflation-ridden 1970s
> provoked a rethinking of the philosophy of economic policy, the roots of
> which were still planted in the Depression era. In the United States,
> that rethinking led to a wave of bipartisan deregulation of
> transportation, energy, and finance. At the same time, there was a
> growing recognition that inflation impaired economic performance.
> Indeed, Group of Seven world leaders at their 1977 Economic Summit
> identified inflation as a cause of unemployment. Moreover, monetary
> policy tightening, and not increased regulation, came to be seen by the
> end of that decade as the only viable solution to taming inflation[2].
> Of course, the startling recovery of war-ravaged West Germany following
> Ludwig Erhard's postwar reforms, and Japan's embrace of global trade,
> were early examples of the policy reevaluation process.
>
> It has taken several decades of experience with markets and competition
> to foster an unwinding of regulatory rigidities. Today, privatization
> and deregulation have become almost synonymous with "reform."
>
> * * *
>
> By any number of measures, globalization has expanded markedly in recent
> decades. Not only has the ratio of international trade in goods and
> services to world GDP risen inexorably over the past half-century, but a
> related measure--the extent to which savers reach beyond their national
> borders to invest in foreign assets--has also risen.
>
> Through much of the post-World War II years, domestic saving for each
> country was invested predominantly in its domestic capital assets,
> irrespective of the potential for superior risk-adjusted returns to be
> available from abroad. Because a country's domestic saving less its
> domestic investment is equal to its current account balance, such
> balances, positive or negative, with the exception of the mid-1980s,
> were therefore generally modest. But in the early 1990s, "home bias"
> began to diminish appreciably,[3] and, hence, the dispersion of curren
t
> account balances among countries has increased markedly. The widening
> current account deficit in the United States has come to dominate the
> tail of that distribution of external balances across countries.
>
> Thus, the decline in home bias, or its equivalent, expanding
> globalization, has apparently enabled the United States to finance and,
> hence, incur so large a current account deficit. As a result of these
> capital flows, the ratio of foreign net claims against U.S. residents to
> our annual GDP has risen to approximately one-fourth. While some other
> countries are far more in debt to foreigners, at least relative to their
> GDPs, they do not face the scale of international financing that we
require.
>
> A U.S. current account deficit of 5 percent or more of GDP would
> probably not have been readily fundable a half-century ago or perhaps
> even a couple of decades ago.[4] The ability to move that much of worl
d
> saving to the United States in response to relative rates of return
> almost surely would have been hindered by the far-lesser degree of both
> globalization and international financial flexibility that existed at
> the time. Such large transfers would presumably have induced changes in
> the prices of assets that would have proved inhibiting.
>
> Nonetheless, we have little evidence that the economic forces that are
> fostering international specialization, and hence cross-border trade and
> increasing dispersion of current account balances, are as yet
> diminishing. At some point, however, international investors, private
> and official, faced with a concentration of dollar assets in their
> portfolios, will s diversification, irrespective of the competitive
> returns on dollar assets. That shift, over time, would likely induce
> contractions in both the U.S. current account deficit and the
> corresponding current account surpluses of other nations.
>
> Can market forces incrementally defuse a buildup in a nation's current
> account deficit and net external debt before a crisis more abruptly does
> so? The answer seems to lie with the degree of market flexibility. In a
> world economy that is sufficiently flexible, as debt projections rise,
> product and equity prices, interest rates, and exchange rates presumably
> would change to reestablish global balance.[5]
>
> We may not be able to usefully determine at what point foreign
> accumulation of net claims on the United States will slow or even
> reverse, but it is evident that the greater the degree of international
> flexibility, the less the risk of a crisis.[6]
>
> Should globalization continue unfettered and thereby create an ever more
> flexible international financial system, history suggests that current
> account imbalances will be defused with modest risk of disruption. A
> Federal Reserve study of large current account adjustments in developed
> countries,[7] the results of which are presumably applicable to the
> United States, suggests that market forces are likely to restore a more
> long-term sustainable current account balance here without measurable
> disruption. Indeed, this was the case in the second half of the 1980s.
>
> I say this with one major caveat. Protectionism, some signs of which
> have recently emerged, could significantly erode global flexibility and,
> hence, undermine the global adjustment process. We are already
> experiencing pressure to slow down the expansion of trade. The current
> Doha Round of trade negotiations is in some difficulty owing largely to
> the fact that the low-hanging fruit of trade negotiation has already
> been picked in the trade liberalizations that have occurred since the
> Kennedy Round.
>
> * * *
>
> Augmenting the dramatic effect of increased globalization on economic
> growth, and perhaps at some times, fostering it, have been the
> remarkable technological advances of recent decades. In particular,
> information and communication technologies have propelled the processing
> and transmission of data and ideas to a level far beyond our
> capabilities of a decade or two ago.
>
> The advent of real-time information systems has enabled managers to
> organize a workforce without the redundancy required in earlier decades
> to ensure against the type of human error that technology has now made
> far less prevalent. Real-time information, by eliminating much human
> intervention, has markedly reduced scrappage rates on production lines,
> lead times on purchases, and errors in all forms of recordkeeping. Much
> data transfer is now electronic and far more accurate than possible in
> earlier times.
>
> The long-term path of technology and growth is difficult to discern.
> Indeed, innovation, by definition, is not forecastable. Nonetheless, the
> overall pace of productivity growth that has recently been near 5
> percent at an annual rate is highly likely to slow because we have
> rarely exceeded 3 percent for any protracted period. In the United
> States, we have always employed technologies at, or close to, the
> cutting edge, and we have created much of our innovative technologies
> ourselves. The opportunities of many developing economies to borrow
> innovation is not readily available to us. Thus, even though the
> longer-term prospects for innovation and respectable productivity growth
> are encouraging, some near-term slowing in the pace of advance to a rate
> closer to productivity's long-term average seems likely.
>
> * * *
>
> We have, I believe, a reasonably good understanding of why Americans
> have been able to reach farther into global markets, incur significant
> increases in debt, and yet fail to produce the disruptions so often
> observed as a consequence. However, a widely held alternative view of
> the past decade cannot readily be dismissed. That view holds that the
> postwar paradigm is still largely in place, and key financial ratios,
> rather than suggesting a moving structure, reflect extreme values of a
> fixed structure that must eventually adjust, perhaps abruptly.
>
> To be sure, even with the increased flexibility implied in a paradigm of
> expanding globalization and innovation, the combination of exceptionally
> low saving rates and historically high ratios of household debt to
> income can be a concern if incomes unexpectedly fall. Indeed, there is
> little doubt that virtually any debt burden becomes oppressive if
> incomes fall significantly.
>
> But rising debt-to-income ratios can be somewhat misleading as an
> indicator of stress. Indeed the ratio of household debt to income has
> been rising sporadically for more than a half-century, a trend that
> partly reflects the increased capacity of ever-wealthier households to
> service debt. Moreover, a significant part of the recent rise in the
> debt-to-income ratio also reflects the remarkable gain in homeownership.
> Over the past decade, for example, the share of households that owns
> homes has risen from 64 percent to 69 percent. During the decade a
> significant number of renters bought homes, thus increasing the asset
> side of their balance sheets as well as increasing their debt. It can
> scarcely be argued that the substitutions of debt service for rent
> materially impaired the financial state of the new homeowner. Yet the
> process over the past decade added more than 10 percent to outstanding
> mortgage debt and accounted for more than one-seventh of the increase in
> total household debt over that period.[8]
>
> Thus, short of a period of overall economic weakness, households, with
> the exception of some highly leveraged subprime borrowers, do not appear
> to be faced with significant financial strain. With interest rates low,
> debt service costs for households are average, or only marginally higher
> than average. Adding other fixed charges such as rent, utilities, and
> auto-leasing costs does not materially alter the change in the degree of
> burden.
>
> Even should interest rates rise materially further, the effect on
> household expenses will be stretched out because four-fifths of debt is
> fixed rate of varying maturities, and it will take time for debt to
> mature and reflect the higher rates. Despite the almost two percentage
> point rise in mortgage rates on new originations from mid-1999 to
> mid-2000, the average interest rate on outstanding mortgage debt rose
> only slightly, as did debt service.
>
> In a related concern, a number of analysts have conjectured that the
> extended period of low interest rates is spawning a bubble in housing
> prices in the United States that will, at some point, implode. Their
> concern is that, if this were to occur, highly leveraged homeowners will
> be forced to sharply curtail their spending. To be sure, indexes of
> house prices based on repeat sales of existing homes have outstripped
> increases in rents, suggesting at least the possibility of price
> misalignment in some housing markets. A softening in housing markets
> would likely be one of many adjustments that would occur in the wake of
> an increase in interest rates.
>
> But a destabilizing contraction in nationwide house prices does not seem
> the most probable outcome. Indeed, nominal house prices in the aggregate
> have rarely fallen and certainly not by very much.
>
> Still, house prices, like those of many other assets, are difficult to
> predict, and movements in those prices can be of macroeconomic
> significance. Moreover, because these transactions often involve
> considerable leverage, they need to be monitored by those responsible
> for fostering financial stability.
>
> There appears, at the moment, to be little concern about corporate
> financial imbalances. Debt-to-equity ratios are well within historical
> ranges, and the recent prolonged period of low long-term interest rates
> has enabled corporations to fund short-term liabilities and stretch out
> bond maturities. Even the relatively narrow spreads on
> below-investment-grade corporate debt appear to reflect low expected
> losses rather than an especially small aversion to risk.
>
> The resolution of our current account deficit and household debt burdens
> does not strike me as overly worrisome, but that is certainly not the
> case for our yawning fiscal deficit. Our fiscal prospects are, in my
> judgment, a significant obstacle to long-term stability because the
> budget deficit is not readily subject to correction by market forces
> that stabilize other imbalances.
>
> One issue that concerns most analysts, especially in the context of a
> widening structural federal deficit, is inadequate national saving.
> Fortunately, our meager domestic savings, and those attracted from
> abroad, are being very effectively invested in domestic capital assets.
> The efficiency of our capital stock thus has been an important offset to
> what, by any standard, has been an exceptionally low domestic saving
> rate in the United States. Although saving is a necessary condition for
> financing the capital investment required to engender productivity, it
> is not a sufficient condition. The very high saving rates of the Soviet
> Union, of China, and of India in earlier decades, often did not foster
> significant productivity growth in those countries. Saving squandered in
> financing inefficient technologies does not advance living standards. It
> is thus difficult to judge how significant a problem our relatively low
> gross domestic saving rate is to the future growth of an efficient
> capital stock. The high productivity growth rate of the past decade does
> not suggest a problem. But our success in attracting savings from abroad
> may be masking the full effect of deficient domestic saving.
>
> * * *
>
> Our day-by-day experiences with the effectiveness of flexible markets as
> they adjust to, and correct, imbalances can readily lead us to the
> conclusion that once markets are purged of rigidities, macroeconomic
> disturbances will become a historical relic. However, the penchant of
> humans for quirky, often irrational, behavior gets in the way of this
> conclusion. A discontinuity in valuation judgments, often the cause or
> consequence of a building and bursting of a bubble, can occasionally
> destabilize even the most liquid and flexible of markets. I do not have
> much to add on this issue except to reiterate our need to better
> understand it.
>
> * * *
>
> The last three decades have witnessed a significant coalescing of
> economic policy philosophies. Central planning has been judged as
> ineffective and is now generally avoided. Market flexibility has become
> the focus, albeit often hesitant focus, of reform in most countries. All
> policymakers are struggling to understand global and technological
> changes that appear to have profoundly altered world economic
> developments. For most economic participants, these changes appear to
> have had positive effects on their economic well-being. But a
> significant minority, trapped on the adverse side of creative
> destruction, are suffering. This is an issue that needs to be addressed
> if globalization is to sustain the necessary public support.
>
> * * *
>
> The competitive state of banking, the subject of this conference, will
> be significantly affected by the path of global financial and
> technological innovations. In my judgment, this will be among the most
> significant developments affecting banking in the next decades.
>
> Footnotes
>
> 1. Much of what is assembled in final salable form in the United States,
> for example, may consist of components from many continents. Companies
> s out the lowest costs of inputs to effectively compete for their
> customers' dollars. This international competition left unfettered,
> history suggests, would tend to direct output to the most efficient
> producers of specific products or services and, hence, maximize
> standards of living of all participants in trade. Given the skills and
> education of its workforce and a number of institutional factors, such
> as its legal structure, each economy will achieve its maximum possible
> average living standard.
>
> 2. This had not always been the case. For example, wage and price
> controls were imposed in the United States in 1971 as a substitute for a
> tighter monetary policy and higher interest rates to address rising
> inflation.
>
> 3. The correlation coefficient between paired domestic saving and
> domestic investment, a conventional measure of the propensity to invest
> at home for OECD countries constituting four-fifths of world GDP, fell
> from 0.96 in 1992 to less than 0.8 in 2002. With rare exceptions, a
> decline in the correlation of countries' paired domestic investment to
> domestic saving implies an increased dispersion of current account
balances.
>
> 4. It is true that estimates of the ratios of the current account to GDP
> for many countries in the nineteenth century are estimated to have been
> as large as, or larger, than we have experienced in recent years.
> However, the substantial net flows of capital financing for those
> earlier deficits were likely motivated in large part by specific major
> development projects (for example, railroads) bearing high expected
> rates of return. By contrast, diversification appears to be a more
> salient motivation for today's large net capital flows. Moreover, gross
> capital flows are believed to be considerably greater relative to GDP in
> recent years than in the nineteenth century. (See Alan M. ;Taylor, "A
> Century of Current Account Dynamics," Journal of International Money and
> Finance, 2002, pp. 725-48, and Maurice Obstfeld and Alan M. Taylor,
> "Globalization and Capital Markets," NBER Working Paper 8846, March 2002.)
>
> 5. The experience over the past two centuries of trade and finance among
> the individual states that make up the United States comes close to that
> paradigm of flexibility, even though exchange rates among the states
> have been fixed. Although we have scant data on cross-border
> transactions among the separate states, anecdotal evidence suggests that
> over the decades significant apparent imbalances have been resolved
> without precipitating interstate balance-of-payments crises. The
> dispersion of unemployment rates among the states, one measure of
> imbalances, spikes during periods of economic stress but rapidly returns
> to modest levels, a pattern reflecting a high degree of adjustment
> flexibility. That flexibility is even more apparent in regional money
> markets, where interest rates that presumably reflect differential
> imbalances in states' current accounts and hence cross-border borrowing
> requirements have, in recent years, exhibited very little interstate
> dispersion. This observation suggests either negligible
> cross-state-border imbalances, an unlikely occurrence given the pattern
> of state unemployment dispersion, or more likely very rapid financial
> adjustments.
>
> 6. Although increased flexibility apparently promotes resolution of
> current account imbalances without significant disruption, it may also
> allow larger deficits to emerge before markets are required to address
> them. Moreover, the apparent ability of the U.S. economy to withstand
> the stock market plunge of 2000, the terrorist attacks of 9/11,
> corporate governance scandals, and wars in Afghanistan and Iraq
> indicates a greater degree of economic flexibility than was apparent in
> the 1970s and earlier.
>
> 7. Caroline Freund, "Current Account Adjustment in Industrialized
> Countries," Board of Governors of the Federal Reserve System,
> International Finance Discussion Paper No. 692, December 2000.
>
> 8. For statistical methodology see Karen Dynan, Kathleen Johnson, and
> Karen Pence, "Recent Changes to a Measure of U.S. Household Debt
> Service," Federal Reserve Bulletin, vol. 89 (October 2003), pp. 417-26.
>
>
>
> --
> The incapacity of a weak and distracted government may
> often assume the appearance, and produce the effects,
> of a treasonable correspondence with the public enemy.
>                    --Gibbon, "Decline and Fall of the Roman Empire"
>

On Thu, 06 May 2004 21:52:09 GMT, "Pablito" <pablocsm1@comcast.net> wrote:



>I really don't look forward to my standard of living
>being reduced to the international median,

Me either.

>and that
>is exactly what the future outcome will be on the present
>course that our country is traveling.

Yep.

>Greenspan is not making any mention of it, but for the future, the planning
>is to follow something of the Indian
>caste system.  and all the benefits that might be reaped
>by internationalist thinking and society, will not really
>trickle down to the middle class, or the working people...

There will not _BE_ a middle class.  Very wealthy, very poor, nobody else.

>Before the doors close, might be a good time to become
>a member of your Masonic lodge, or a member of some
>other international societal organization, and be accepted
>into their inner circle.

To what end?  They gonna save us?

Dave Head

>Pablito
> ****************************************
*

"Dave Head" <rally2xs@att.net> wrote in message
 news:i42m901uri3lle3rqmchtoauhsiooltglo@
4ax.com...
> On Thu, 06 May 2004 21:52:09 GMT, "Pablito" <pablocsm1@comcast.net> wrote:
>
> There will not _BE_ a middle class.  Very wealthy, very poor, nobody else.
>

Yes, but the poor in the U.S. will be armed, so look for a second revolution
to occur when it gets to this point.

"Pablito" <pablocsm1@comcast.net> wrote:

>The man need to get his nose out of his text book and
>come visit the real world.

A lot of financial commentators think that Greenspan is either
an incompetent fool or a charlatan.  I would go with the
latter.  He is the Rothschilds' man in Washington.


>As hypotheses, any idea or thought can be expounded
>upon.  The numbers might look real good when balanced
>on an international relativity, with a swing from the
>bottom, third world economy, to our US economy, and
>then taking a median slice out of the linear portion of the
>curve, and calling this the norm...
>
>I really don't look forward to my standard of living
>being reduced to the international median,  and that
>is exactly what the future outcome will be on the present
>course that our country is traveling.
>Greenspan is not making any mention of it, but for the future, the planning
>is to follow something of the Indian
>caste system.  and all the benefits that might be reaped
>by internationalist thinking and society, will not really
>trickle down to the middle class, or the working people...
>
>Before the doors close, might be a good time to become
>a member of your Masonic lodge, or a member of some
>other international societal organization, and be accepted
>into their inner circle.
>
B'nai B'rith would be your best bet.  Too bad they
don't accept any new members except by birth.

On Fri, 7 May 2004 01:03:29 -0400, "Sparky"
<sparky@no.spam.wanted.you.fool.org> wrote:

>
>"Dave Head" <rally2xs@att.net> wrote in message
> news:i42m901uri3lle3rqmchtoauhsiooltglo@
4ax.com... 
>
>Yes, but the poor in the U.S. will be armed, so look for a second revolutio
n
>to occur when it gets to this point.

Absolutely agree, and it will probably occur well before everyone gets reall
y
poor, too.

With increased H-1B and L1 influx of "guest workers", America could become a
really dangerous place for anyone with an accent and an America job...

Dave Head
>

Sparky wrote:
> "Dave Head" <rally2xs@att.net> wrote in message
>  news:i42m901uri3lle3rqmchtoauhsiooltglo@
4ax.com...
> 
>
>
> Yes, but the poor in the U.S. will be armed, so look for a second revoluti
on
> to occur when it gets to this point.

Seizing the reins of political power will not make them any more
wealthy, especially if the remaining Means of Production are damaged in
the process.

Furthermore, in recent years we've become so dependent on Just In Time
logistics that even if the MOP weren't damaged, it could take an
impossible amount of time to restabilized the supply lines. Considering
how many of those supply-lines originate overseas these days, it might
better behoove the foreigners to simply abandon us as consumers (we
don't produce much except hot air and weapons-systems) and let us rot in
our own mess, on a continent which is populated to about 10-20 times the
carrying-capacity of the natural ecology (which is in any case badly
damaged).

Perhaps you just haven't thought this through, or there's nothing you'd
like to see better than the US taken out of the global picture even if
the cost of that is the nasty lingering deaths of about 250-millions of
people.




--
The incapacity of a weak and distracted government may
often assume the appearance, and produce the effects,
of a treasonable correspondence with the public enemy.
--Gibbon, "Decline and Fall of the Roman Empire"

Sparky wrote:
>
> Yes, but the poor in the U.S. will be armed, so look for a second revoluti
on
> to occur when it gets to this point.
>

When was the last armed revolution in a western, industrialized country?
If you count Russia which really is not western, 1917 is the year. That
is 87 years ago. Keep in mind the government has tanks, helicopters and
planes as well as artillery and soldiers willing to use all of the
foregoing. If there is a second revolution it will be surpressed in a
most bloody manner.

I am not counting the coup that removed Rheza Pahlivi from power in
Iran. That was not a revolution. It was a coup d'etat. The society was
in nowise transformed. The Wogs got rid of a Shah and allowed themselves
to be ruled by Shi'ite Mullahs which was in line with their current
religous superstitions.

Bob Kolker

Max Mustermann wrote:

>
> B'nai B'rith would be your best bet.  Too bad they
> don't accept any new members except by birth.

Also valid conversion to Judaism.

Bob Kolker

>
>
>
>
>
>
>
>
>
>
>
>
>

On Fri, 07 May 2004 03:53:54 GMT, Dave Head <rally2xs@att.net> wrote:
>
>There will not _BE_ a middle class.  Very wealthy, very poor, nobody else.
>

You guys need treatment. Seriously! Your mind is no longer able to
distinguish fantasy from fact. Get treated, please!



--
"A democracy is nothing more than mob rule, where fifty-one
percent of the people may take away the rights of the other
forty-nine." -- Thomas Jefferson