alan greenspan : stability and economic growth a€ “ the role of the central bank remarks by mr alan greenspan, chairman of the board of governors of the us federal reserve system, before the banco de mexico's 80th anniversary international conference, mexico city ( via videoconference ), 14 november 2005. * * * international finance presents us with a number of intriguing anomalies, but the one that seems to bedevil monetary policy makers the most as they seek stability and growth ( the topic of this conference ) is the seemingly endless ability of the united states to finance its current account deficit. to date, despite a current account deficit exceeding 6 percent of our gross domestic product ( gdp ), we - - or more exactly, the economic entities that comprise the u. s. economy - - are experiencing few difficulties in attracting the foreign saving required to finance it, as evidenced by the recent upward pressure on the dollar. the markets are not behaving in the way that some, if not most, analysts anticipated as the u. s. current account deficit rose above its previous high of 3 - 1 / 2 percent of gdp recorded in 1986. of course, deficits that cumulate to ever - increasing net external debt, with its attendant rise in servicing costs, cannot persist indefinitely. at some point investors will balk at further financing. such a development would be particularly likely should risk - adjusted rates of return on assets outside the united states rise relative to investment opportunities in the united states. even if such returns on u. s. assets stay high, the rise of concentration risks in foreign official and private portfolios could still induce investors to slow their accumulation of dollar claims and thereby delimit the size of the financeable u. s. current account deficit. however, the adjustment of the u. s. external balance, when it comes, doubtless will be initiated by the actions both of foreign investors and of u. s. residents. whatever the triggers for adjustment, the move toward current account balance, in addition to being driven by foreign investors altering their external portfolios, presumably would also reflect actions by u. s. residents to address domestic imbalances. in all instances, a current account balance is essentially the product of a wide - ranging interactive process that reflects the production and allocation of goods, services, and incomes among the residents of a country and those of the rest of the world. the outcome encompasses the full array of domestic and international product and asset prices

67 over the next two decades, the ratio of the number of years that the typical worker will spend in retirement to the number of years he or she works will rise in the long term. a critical step forward would be to adjust the system so that this ratio stabilizes. a number of specific approaches have been proposed for implementing this indexation, but the principle behind all of them is to insulate the finances of the system, at least to a degree, from further changes in life expectancy. sound private and public decisionmaking will be aided by determining ahead of the fact how one source of risk, namely demographic developments, will be dealt with. the degree of uncertainty about whether future resources will be adequate to meet our current statutory obligations to the coming generations of retirees is daunting. the concern is not so much about social security, where benefits are tied in a mechanical fashion to retirees ’ wage histories and we have some useful tools for forecasting future outlays. the outlook for medicare, however, is much more difficult to assess. although forecasting the number of program beneficiaries is reasonably straightforward, we know very little about how rapidly medical technology will continue to advance and how those innovations will translate into future spending. to be sure, technological innovations can greatly improve the quality of medical care and can, in theory, reduce the costs of existing treatments. but because medical technology expands the range of treatment options, it also has the potential of adding to overall spending - in some cases, significantly. as a result, the range of possible outlays per recipient is extremely wide. this uncertainty is an important reason to be cautious - especially given that government programs, whether for spending or for tax preferences, are easy to initiate but can be extraordinarily difficult to shut down once constituencies for them develop. in view of this upward ratchet in government programs and the enormous uncertainty about the upper bounds of future demands for medical care, i believe that a thorough review of our spending commitments - and at least some adjustment in those commitments - is necessary for prudent policy. i also believe that we have an obligation to those in and near retirement to honor what has been promised to them. if changes need to be made, they should be made soon enough so that future retirees have time to adjust their plans for retirement spending and to make sure that their personal resources, along with what they expect to receive from the government, will be sufficient to meet their retirement needs. i certainly