crisis. any diminution of the reserve status of the dollar, should it occur, is likely to be readily absorbed by a far more flexible u. s. economy than existed in britain immediately following world war ii. this, of course, presupposes that we in the united states in the years ahead maintain and, i trust, enhance our economy's degree of flexibility and our involvement in the highly successful globalization of recent decades. governments today, although still far more activist than in the nineteenth and early twentieth centuries, are rediscovering the benefits of competition and the resilience to economic shocks that it fosters. we are also beginning to recognize an international version of smith's invisible hand in the globalization of economic forces. whether by intention or by happenstance, many, if not most, governments in recent decades have been relying more and more on the forces of the marketplace and reducing their intervention in market outcomes. we appear to be revisiting adam smith's notion that the more flexible an economy, the greater its ability to self - correct after inevitable, often unanticipated disturbances. that greater tendency toward self - correction has made the cyclical stability of an economy less dependent on the actions of macroeconomic policy makers, whose responses often have come too late or have been misguided. being able to rely on markets to do the heavy lifting of adjustment is an exceptionally valuable policy asset. the impressive performance of the u. s. economy over the past couple of decades, despite shocks that in the past would have surely produced marked economic disruption, offers the clearest evidence of the benefits of increased market flexibility. we weathered a decline on october 19, 1987, of a fifth of the market value of u. s. equities with little evidence of subsequent macroeconomic stress - - an episode that hinted at a change in adjustment dynamics. the credit crunch of the early 1990s and the bursting of the stock market bubble in 2000 were absorbed with the shallowest recessions in the post - world war ii period. and the economic fallout from the tragic events of september 11, 2001, was moderated by market forces, with severe economic weakness evident for only a few weeks. most recently, the flexibility of our market - driven economy has allowed us, thus far, to weather reasonably well the steep rise in spot and futures prices for oil and natural gas that we have experienced over the past two years. the consequence of this flexibility has been a far more stable

saving, or of foreign saving, is attracted to fund domestic investment. aside from the ex ante average inclination of the residents of a country toward home bias, the difference between domestic saving and domestic investment, that is, the current account balance, is determined by the potential rate of return on foreign investments relative to domestic investments as well as a nation's underlying propensity to save relative to that of other nations. indeed, all of these factors working simultaneously determine the extent to which domestic savers successfully reach beyond their borders to, on net, invest in foreign assets and thereby create current account surpluses and deficits. that ex post relationship, the correlation between actual - - instead of intended - - domestic saving and domestic investment was the object of the seminal work by feldstein and horioka a quarter century ago. 4 without the evident worldwide fall in home bias over the past joshua d. coval and tobias j. moskowitz, " home bias at home : local equity preference in domestic portfolios, " the journal of finance, december 1999, pp. 2045 - 2073. national income accounting establishes that the gap between domestic saving and domestic investment is equivalent to net foreign saving ; net foreign saving is a close approximation of the current account balance. since domestic saving less domestic investment is equal, with small adjustments, to the current account balance, the dispersion of domestic saving less domestic investment among nations is a very close approximation to the dispersion of current account deficits. the article implied that global savings are inefficiently distributed to investment, meaning that savers are bearing too much risk for the returns they achieve and that countries with high - potential investment projects are getting less financing than they could productively employ. savers tend, to their own detriment, to over - discount foreign returns. such suboptimal 2 / 5 decade, noted earlier, the united states would not have been able to finance its recent current account deficits, and, accordingly, these deficits would have been smaller. the decline in home bias reflects a number of recent factors that have converged to lessen restraints on cross - border financial flows as well as on trade in goods and services. in addition to the dismantling of restrictions on capital flows, the advance of information and communication technologies has effectively shrunk the time and distance that separate markets around the world. the vast improvements in these new technologies have broadened investors'vision to the point that