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fomc | 2,004 | Mr. Chairman, may I? | 7 |
fomc | 2,004 | Certainly. | 2 |
fomc | 2,004 | We have looked, partly at your suggestion, into whether the lags might have changed, because I think the mechanism you are talking about would likely show up as a longer pass-through lag. Obviously we don't have enough data to determine if this is a recent change in the past couple of years; we can't tell. We looked at... | 96 |
fomc | 2,004 | Thank you. Looking at the broader question of the very important impact in terms of contractionary effects on foreign economies, are the calculations here made interactive? In other words, are we getting two static estimates, or are we getting a dynamic estimate--a feedback from the United States to foreign economies a... | 61 |
fomc | 2,004 | There would be dynamic feedbacks. We use the FRB/Global model, which will simultaneously capture both effects--from the United States on foreign economies and from foreign economies on this country. So, yes, it's a property of the model that things that happen in the United States have a bigger effect on the rest of th... | 135 |
fomc | 2,004 | All of this says, at the end of the day, that the U.S. current account deficit is rising as a percent of our GDP, or in a certain sense as a percent of world GDP, implying that we must be getting comparably increasing surpluses elsewhere in the world. Or put another way, this implies that the dispersion of the world's ... | 253 |
fomc | 2,004 | To be honest, I don't have those numbers in front of me. | 14 |
fomc | 2,004 | Could you get them? | 5 |
fomc | 2,004 | We could certainly calculate world exports to world GDP. My guess is that it won't have slowed. | 19 |
fomc | 2,004 | It slowed down very dramatically a couple of years ago. | 11 |
fomc | 2,004 | Well, the recession. | 5 |
fomc | 2,004 | Yes, but has it come all the way back? | 11 |
fomc | 2,004 | I can't answer that exactly. Part of the problem, of course, is finding the units in which to add up world exports and world GDP; that requires us to use data sources that are not available on a timely basis. I don't have world GDP for Q1; that number doesn't exist. | 59 |
fomc | 2,004 | You don't? What a shock! [Laughter] | 11 |
fomc | 2,004 | But what is true is that the global recession and recovery tended to be more intensive in goods than in services. They tended to be investment driven, at least in the United States and to some extent elsewhere. And trade is more goods intensive than is GDP, broadly speaking. So we saw imports and exports react more tha... | 198 |
fomc | 2,004 | But isn't that also a function of the rate of change in the exchange rate itself? | 17 |
fomc | 2,004 | There were at least three components. One, there was an exchange rate effect. Two, there was the euro. And there was a third factor that had to do with the increased automation in terms of how the exchange market operated. Electronic brokering, for example, became very, very important. | 59 |
fomc | 2,004 | It grosses up everything. | 5 |
fomc | 2,004 | Exactly. The numbers were down about 20 percent from '98 to '01, but all of the signals that we are getting now suggest that the survey just concluded in '04 will show another increase. | 41 |
fomc | 2,004 | But the grossing doesn't tell us what the consolidated change in globalization is. The trade balances do, obviously, and the balance sheet changes do because they are all directly related algebraically to the current account balances and, hence, to the degree of dispersion. There is a chart in exhibit 2 of Karen's mate... | 191 |
fomc | 2,004 | That was just imposed on the chart. | 8 |
fomc | 2,004 | I see. | 3 |
fomc | 2,004 | There were some assumptions made about continuing certain behaviors and extrapolating them and so forth, but I deliberately didn't want the red to have to go away, so I told the people who prepared the chart that it should have some red on it. [Laughter] | 53 |
fomc | 2,004 | So the red is there first, and private financial inflows are the residual? | 16 |
fomc | 2,004 | Well, these are hypothetical. Of all the pieces of the story, the composition of the capital flows that will finance the U.S. current account is the most subject to change and the least predictable. So it would be foolhardy for us to claim in any sense that we have written down a serious forecast. I simply wanted to sh... | 80 |
fomc | 2,004 | It's actually very helpful to see a base because you can always make your own adjustments. It's the orders of magnitude that I find really very useful. | 29 |
fomc | 2,004 | Similarly, I didn't want the tan portion to grow too much or to grow too little either. It is important to realize that not only do we have to finance the U.S. current account deficit but we have to take into account the reality of U.S. investors buying claims on the rest of the world. The elements of globalization tha... | 141 |
fomc | 2,004 | Could we have a hostile takeover of world statistical discrepancy, which would help? [Laughter] The issue that is unknown here, as far as the dispersion of the current account balances is concerned, is how far it can go. Unless the circumstances lead to unfinanceable ratios of net claims against a country relative to i... | 97 |
fomc | 2,004 | No, there's just the ultimate final condition that it can't continue forever. | 14 |
fomc | 2,004 | That brings up Herb Stein's famous quote as usual. | 11 |
fomc | 2,004 | Yes, indeed. | 4 |
fomc | 2,004 | It's really quite a useful data system that you have set up to provide a sense of the orders of magnitude. Unfortunately, I was distracted when you were discussing exactly what the definitions were of the figures in the box in the bottom left-hand corner of exhibit 3. This is a share of the portfolio of what? | 63 |
fomc | 2,004 | For each of these countries, it is the portfolios of their residents. In other words, line 1 refers to the portfolios of euro area residents, 85 percent of which are held in domestic euro area securities. | 43 |
fomc | 2,004 | Okay, it's the residents of these countries. | 9 |
fomc | 2,004 | Yes. And they hold 5 percent of their portfolios in U.S. securities, leaving 10 percent held in non-U.S. foreign securities. | 30 |
fomc | 2,004 | Okay. | 2 |
fomc | 2,004 | I'm sorry to interrupt, but is that the same measure of foreign holdings of U.S. assets shown under the disorderly adjustment scenarios? Is that the same thing? | 33 |
fomc | 2,004 | Well, yes, in the sense that the figures in column 2 would be the same. But the denominator here is the portfolio per country. | 29 |
fomc | 2,004 | And the denominator in the other is the country's own GDP? | 12 |
fomc | 2,004 | Yes, their GDP. | 5 |
fomc | 2,004 | So even though the euro area has only 5.4 percent of its portfolio in U.S. securities, that figure is equivalent to 37 percent of its own GDP? | 35 |
fomc | 2,004 | Yes, but let me amend my answer to you a second ago. In exhibit 3, the figure in the column labeled "U.S. securities" is bonds and equities. | 36 |
fomc | 2,004 | And this other one is all-inclusive? | 8 |
fomc | 2,004 | This is all claims, including foreign direct investment holdings--claims in the United States through that channel. | 20 |
fomc | 2,004 | So European-owned banks are part of it? | 9 |
fomc | 2,004 | Yes, and Chrysler and all the other investment assets that Europeans have bought. | 15 |
fomc | 2,004 | I'm sorry, I apologize for interrupting. | 9 |
fomc | 2,004 | Theoretically, that figure could go well over 100 percent. In other words, you indicated that this struck you as an indication that foreigners are already heavily invested in U.S. assets, but a country like Belgium, say, could end up with gross net claims against other countries. | 58 |
fomc | 2,004 | In exhibit 4, my point is that if there is a disorderly adjustment, the balance sheet effects are likely to be felt more by residents of other countries than they will be by residents of the United States. | 43 |
fomc | 2,004 | I think that was well demonstrated. I congratulate you. It was an awful lot of work, and although there were no definitive conclusions here, I think you've set up a structure that gives us a detailed sense of what is involved in the funding of the international financial system. Questions? Governor Gramlich. | 60 |
fomc | 2,004 | First, I tend to be in sympathy with the view expressed by Karen and Joe that this growing external deficit is probably going to cause trouble at some point. It's hard to know when. But if I understand what you did in exhibit 5, the disorderly adjustment scenarios, it strikes me that you may have over-proved the point.... | 166 |
fomc | 2,004 | Fiscal policy certainly could help. The models are such that if you want to hit a target, you can raise or lower taxes or raise spending enough to help to some extent. You might not like the other consequences. But the answer to your question is yes. While we did not actually run those types of simulations, the logic o... | 79 |
fomc | 2,004 | Has there ever been in the international arena any evidence that governments have responded to crises by appropriate use of fiscal policy? [Laughter] | 27 |
fomc | 2,004 | And these governments, in particular, are already challenged with respect to fiscal policy. [Laughter] But it is hard to see anywhere on earth, with the possible exception of some Asian countries, where the governments themselves perceive the scope of using fiscal policy in that way, whether they could do it well or no... | 63 |
fomc | 2,004 | I am not here to praise fiscal policy. But suppose we have a disorderly adjustment. I think it is interesting, when you strip it all away, to ask, What is the problem with that? If the problem is really that policy either won't adjust appropriately in the case of fiscal policy or can't adjust in the case of monetary po... | 86 |
fomc | 2,004 | We take that point very seriously. And it may be one reason--maybe some of you have noticed it, too--that, when we go to international meetings, it is always the other people around the table who are complaining about the U.S. deficit and worry that it is going to cause a problem. That may be because, in fact, the prob... | 111 |
fomc | 2,004 | Governor Gramlich, may I add that I agree with the outcomes of the scenarios, but there is also a lot of redistribution across industries going on in the background here. There's a shift from capital goods sectors toward export-oriented sectors and the ones that were competing with imports. I don't know to what extent ... | 93 |
fomc | 2,004 | As long as I have the floor, could I ask Linda a question as well? | 17 |
fomc | 2,004 | Of course. I don't know if you're going to get an answer! [Laughter] | 18 |
fomc | 2,004 | Well, I'm sure I'll get an answer. Actually, I'm not sure I have totally grasped all this. In looking at your exhibit 1, suppose the dollar changes a lot. There are three ramifications on industry that you've highlighted. One is that the costs go up, and that's bad; that's illustrated by the yellow bars. The import sha... | 171 |
fomc | 2,004 | What I've done is a bit more limited in that I've looked historically at the effects of exchange rate movements on profitability and the net effects in terms of the first two bars, which are the revenue exposures versus their cost exposures. And I've found that those effects are a very significant issue for them, as is... | 271 |
fomc | 2,004 | Incidentally, the input-output cost data you have are now for '92 to '97? | 19 |
fomc | 2,004 | Yes. | 2 |
fomc | 2,004 | Were these numbers in exhibit 1 for a specific year? | 12 |
fomc | 2,004 | Yes. These numbers are, I believe, for 2002. | 14 |
fomc | 2,004 | You've estimated the costs using the 1997 input-output data, which is close enough or should be. | 21 |
fomc | 2,004 | Right. | 2 |
fomc | 2,004 | President Santomero. | 5 |
fomc | 2,004 | Just a quick follow-up on exhibit 5 and the disorderly adjustment scenarios. You indicate that for the United States you have a Taylor rule kind of reaction for policy. In the most benign case, scenario number 1, what kind of adjustment do we need domestically and--to the extent you can characterize the international a... | 74 |
fomc | 2,004 | In scenario 1, we have the federal funds rate following a Taylor rule. The funds rate increases 70 basis points in the first half and gradually moves up about 200 basis points. I don't have a weighted foreign adjustment, but I can tell you that, in the case of our major trading partners, they hit the zero bound in that... | 71 |
fomc | 2,004 | Even in scenario number 1? | 7 |
fomc | 2,004 | Yes, but just barely. In scenario 2 they are quite strongly constrained; in scenario 1 they just barely hit the zero-bound constraint. I could tell you how much they would have to lower rates if there were no zero bound: Japanese rates would be down 300 basis points, and euro rates would be down 400 basis points. | 69 |
fomc | 2,004 | If they didn't hit the zero bound, your scenario 1 line wouldn't go much below zero, would it? | 22 |
fomc | 2,004 | No, because they just barely hit the zero bound. So, it's true that if you're looking at the effect on their GDP--is that what you're looking at? | 33 |
fomc | 2,004 | Yes. | 2 |
fomc | 2,004 | In that case, in the bottom left panel, the dotted black line goes down to minus 11/2 percent rather than minus 21/2 percent. | 32 |
fomc | 2,004 | In some sense, if monetary policy could work immediately and without friction, none of the GDP lines would move in this scenario 1. | 27 |
fomc | 2,004 | President Hoenig. | 4 |
fomc | 2,004 | Just a follow-up. The orderly and disorderly adjustment scenarios are based on where we are today, if I understand correctly? | 25 |
fomc | 2,004 | Yes. And in some sense, the elephant in the room is the size of the current trade balance. | 21 |
fomc | 2,004 | You're saying that this can continue, though you don't know for how long, and as it does-- | 20 |
fomc | 2,004 | The elephant grows. | 4 |
fomc | 2,004 | The consequences grow. And yet there is nothing we can do about it, which is an interesting conclusion. | 21 |
fomc | 2,004 | In some sense, there's nothing we need to do about it. On the other hand, I do lose a little sleep over that conclusion. But I do believe that global capital markets are better at deciding where the world's capital ought to be put than almost any other mechanism I can think of. | 58 |
fomc | 2,004 | But we know that at times it gives us a terrible headache. | 13 |
fomc | 2,004 | It can. And it's certainly true that factors like U.S. fiscal policy bear on the intertemporal consequences of allowing this deficit to run. It bears on a much broader issue of intertemporal resource utilization in this country that includes our borrowings from abroad and our repayments or servicing of those borrowings... | 239 |
fomc | 2,004 | We have a long list of people who wish to speak, but I think we can break for coffee at this stage. Let's get back in ten minutes, plus or minus thirty-three seconds. | 38 |
fomc | 2,004 | Governor Ferguson. | 3 |
fomc | 2,004 | Thank you. I'd like to take us back to a point that Linda made in passing because it's one that worries me a bit. There is the sense not just that an adjustment between the consumption of foreign-produced goods and the consumption of domestic goods is involved but also that there would be a switch in the nature of good... | 203 |
fomc | 2,004 | Well, if the dollar depreciation is part of the larger switch of investor sentiment, for example, out of asset holdings in the United States, we'd have higher interest rates and lower investment spending. In terms of the overall GDP effect, that is offset to a large degree in the simulations by the expansion of product... | 115 |
fomc | 2,004 | Linda is referring primarily, at least in the last portion of her answer to you, to what we might call adjustment costs. The mix of U.S. GDP that would come out of this depends entirely on just where the shock starts, how it makes its way through the economy, and in particular, how monetary policy has to respond. In th... | 163 |
fomc | 2,004 | We've got a budding politician here! [Laughter] | 11 |
fomc | 2,004 | That mix shift doesn't necessarily have to mean that it is somehow an unwelcome development in the U.S. economy and that we're going to have a smaller manufacturing sector. We may have a bigger manufacturing sector. We may have more investment in certain sectors, but we'll have less investment in other sectors. Looking... | 331 |
fomc | 2,004 | I would just add, though, that in the case of this asset preference shock that Karen noted, we are going to have higher real interest rates, which will crowd out a certain amount of interest-sensitive spending. Some of that will fall on housing investment and some on consumer durables, but some of it will fall on busin... | 70 |
fomc | 2,004 | A lot of this adjustment takes the differential in productivity growth rates in the United States versus foreign economies as exogenous. And what those differentials are really has a great deal to do with the adjustment process. | 41 |
fomc | 2,004 | Yes. Indeed, in the background paper we reported another model simulation, which we did not describe today, that makes the shock the productivity story. It involves a one-time productivity shock that works its way through the whole global economy. And you can see how that world looks different from the one in which ass... | 64 |
fomc | 2,004 | But I think to some degree the conclusion from all of this, Karen--your point that exhibit 5 suggests that it's more the rest of the world's problem than ours--is not quite right. There's obviously a reason for all of us to be worried about the outcome from even an orderly adjustment. As you indicated, depending on the... | 130 |
fomc | 2,004 | Yes, right. But a stark case of that point is the difference between productivity opportunities emerging abroad that attract capital abroad, as opposed to just a widening of the risk premium because people become disheartened by the course of policy or the politics or the outlook for the United States for some reason. ... | 81 |
fomc | 2,004 | President Minehan. | 4 |
fomc | 2,004 | First, let me compliment everybody who made a presentation today and those who wrote the papers because I think they did an extraordinarily good job--for those of us who don't live in this arena all the time--of making a lot of complex things quite interesting and quite compelling. I want to ask a couple of questions, ... | 750 |
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