, such as rental payments of tenants, consumer installment credit, and auto leases, the total servicing costs faced by households relative to their income appears somewhat elevated compared with longer - run averages. but arguably they are not a significant cause for concern. some strain from corporate debt burdens became evident as rates of return on capital projects financed with debt fell short of expectations over the past several years. while overall debt has not been paid down, corporations have significantly increased holdings of cash and have reduced their near - term debt obligations by issuing bonds to pay down commercial paper and bank loans. * * * in early 2000, as financial imbalances and increased risk brought the surge in capital investment to an end, significant profitable opportunities remained to be exploited. one must presume that they still exist and may well have been enlarged by subsequent technological advances. indeed, one of the most remarkable features of the performance of the u. s. economy over the past year had been the extraordinary gains in productivity. the increase in output per hour over the year ending in the thirdquarter - 5 - 1 / 2 percent - was the largest increase in several decades. that pace will not likely be sustained, but it suggests that the underlying supports to productivity growth have not yet fully played out. against that background, any significant fall in the current geopolitical and other risks should noticeably improve capital outlays, the indispensable spur to a path of increased economic growth. * * * in summary, as we focus on the dangers of bubbles, deflation, and excess capacity, the marked improvement in the degree of flexibility and resilience exhibited by our economy in recent years should afford us considerable comfort for now. still, economic policymakers are having to grapple with what seems to be a much larger portfolio of problems than that which our predecessors appeared to face a half - century ago. the ever - growing complexity of our global economic and financial system surely plays a role. moreover, the very technologies that have helped us reap enormous efficiencies have also presented us with new challenges by increasing our interconnectedness. i venture that future invitees to the economic club of new york dinners will not lack interesting problems to address.

. it may be useful, as a first step, to consider both the economic circumstances most likely to impede the development of bubbles and the circumstances most conducive to their formation. destabilizing macroeconomic policies and poor economic performance are not likely to provide fertile ground for the optimism that usually accompanies surging asset prices. ironically, low inflation, economic stability, and low risk premiums may provide tinder for asset price speculation that could be sparked should technological innovations open up new opportunities for profitable investment. even in such circumstances, bubble pricing is likely to be inhibited for a company with a history. to be sure, the stock prices of old - line companies do rise somewhat through arbitrage when the market as a whole is propelled higher by stock prices of cutting - edge technologies. but it is difficult to imagine stock prices of most well - established and seasoned old - line companies surging to wholly unsustainable heights. with some prominent exceptions, their capabilities for future profits have been largely tested and delimited. the situation is likely different in the case of a new company that employs an innovative technology. under these circumstances, the dispersion of rationally imagined possible future outcomes could be wide. if forecasts are unfettered by a need for consistency with the past, investors might take off on unwarranted flights of optimism. moreover, skeptics find it too expensive or too risky to short sell the shares of such a company, especially when its stock price is rising rapidly. the conditions of extended low inflation and low risk were combined with breakthrough technologies to produce the bubble of recent years. but do such conditions always produce a bubble? it seems improbable that a surge in innovation in the near future would generate a new bubble of substantial proportions. investors are likely to be sensitive to the need for asset prices to be backed ultimately by an ongoing stream of earnings. hence, a further necessary condition for the emergence of a bubble is the passage of sufficient time to erode the traumatic memories of earlier post - bubble experiences. * * * most standard macroeconomic models fitted to the experience of recent decades imply that a distortion in valuation ratios induced by a bubble can be offset by adopting a sufficiently restrictive monetary policy. according to such models, a tighter monetary policy, on average, credibly constrains demand and lowers asset prices, all else being equal. these models can also be interpreted to suggest that incremental monetary tightening can gradually def