certainly going to be a smaller part of the economy than it was when lax credit standards encouraged overbuilding and overborrowing. increased private saving and reduced demand for housing should prompt movements in relative prices and other factors that will, in turn, make room for a larger role for business investment and net exports in overall economic activity. in addition, households that have worked down debt levels will be less vulnerable and better able to withstand shocks in the future. as i have been emphasizing, the transition to full employment and the emergence of this new configuration of spending and production, and borrowing and saving, will take time. this rebalancing involves repairs to balance sheets, the movement of capital and labor across sectors of the economy, and shifts in the global pattern of production and consumption – adjustments that are likely to be gradual under any conditions. moreover, the re - equilibration may be slower than might otherwise be the case because tight credit will limit the ability of some households and firms to make the necessary adjustments. government policies will be essential to supporting the smooth transition to more - sustainable economic growth with greater investment and exports. we must ensure that changes in taxation and regulation do not blunt incentives for business investment. in addition, although fiscal policy has provided important support for the economic recovery, it will need to be put on a more sustainable path in the medium term. failure to do so risks a market reaction that could increase longer - term interest rates ; economic growth would be hindered if government borrowing boosts the cost of capital and diverts resources away from private investment. reducing the deficit and avoiding a continuing buildup in government debt relative to income will be essential for bringing national production and spending into better balance. that balance, in turn, is necessary so that we are no longer so reliant on borrowing from other nations. heavy dependence on foreign borrowing by the united states is not a solid foundation for long - term economic growth either here or in those countries extending us credit. the actions of u. s. authorities and private parties to bring about a better balance of saving and investment must be matched by action overseas in chronic surplus countries. while we reduce demand relative to our productive potential, the surplus countries must increase their domestic demand if the global economy is to thrive. finally, as has been so painfully demonstrated over the past few years, sustained growth requires a financial system that is much more resilient and thus better equipped to continue to supply funds to creditworthy borrowers when the unexpected happens.

ex post explanation of a period of relative prosperity. if policymakers and market participants presume it to be an entitlement, it will almost surely lose favor. let us look closer at the correlation between confidence and outcomes. asset prices do appear somewhat correlated with volatility associated with the real economy and inflation. for example, equity valuations for u. s. corporations increased more in the past twenty years than in the two decades prior to the great moderation. the price - earnings ratio for s & p 500 firms averaged 14 from 1960 to 1984 and rose to an average of 18 from 1985 to 2006. in addition, term premiums on long - term u. s. treasury securities are estimated to have declined substantially since the late 1980s. 4 moreover, this kim, don h. and jonathan h. wright ( 2005 ), “ an arbitrage - free three - factor term structure model and the recent behavior of long - term yields and distant - horizon forward rates, ” feds 2005 - 33. decline is significantly associated with a reduction in uncertainty about long - run inflation and about short - term interest rates. 5 third, liquidity in u. s. markets also increased significantly in recent years due to increased international capital flows. these flows to the united states from global investors lead to higher liquidity by increasing capital available for investment and facilitating greater transfer and insurability of risk. a recent report by mckinsey & company estimated that aggregate international capital flows amounted to $ 6 trillion in 2005 – almost triple the volume a decade earlier – and that one - quarter of the worldwide volume flowed through the united states. part of the increased international capital financial flows is a result of excess savings in some emerging - market and oil - exporting countries relative to domestic investment – the phenomenon chairman bernanke referred to as the “ global saving glut. ” 6 rapidly aging populations in a few large countries, such as china, germany, and japan, generated high savings. also, some of the fastest growing economies, especially in asia, pursued export - driven growth strategies, thereby accumulating large reserves of foreign - denominated assets. in addition, high prices of oil and other commodities in recent years shifted income from importing nations to exporters, and research suggests that the bulk of these “ windfalls ” has been saved rather than invested. 7 on net, the savings of less developed countries has been deployed to purchase substantial volumes of financial assets in markets in the most developed