have encouraged households to increase their consumption. of course, increased rates of homeownership and household consumption are both good things. however, in the long run, productivity gains are more likely to be driven by nonresidential investment, such as business purchases of new machines. the greater the extent to which capital inflows act to augment residential construction and especially current consumption spending, the greater the future economic burden of repaying the foreign debt is likely to be. a third concern with the pattern of capital flows arises from the indirect effects of those flows on the sectoral composition of the economies that receive them. in the united states, for example, the growth in export - oriented sectors such as manufacturing has been restrained by the u. s. trade imbalance ( although the recent decline in the dollar has alleviated that pressure somewhat ), while sectors producing nontraded goods and services, such as home construction, have grown rapidly. to repay foreign creditors, as it must someday, the united states will need large and healthy export industries. the relative shrinkage in those industries in the presence of current account deficits - a shrinkage that may well have to be reversed in the future - imposes real costs of adjustment on firms and workers in those industries. finally, the large current account deficit of the united states, in particular, requires substantial flows of foreign financing. as i have discussed today, the underlying sources of the u. s. current account deficit appear to be medium - term or even long - term in nature, suggesting that the situation will eventually begin to improve, although a return to approximate balance may take some time. fundamentally, i see no reason why the whole process should not proceed smoothly. however, the risk of a disorderly adjustment in financial markets always exists, and the appropriately conservative approach for policymakers is to be on guard for any such developments. what policy options exist to deal with the u. s. current account deficit? i have downplayed the role of the u. s. federal budget deficit today, and i disagree with the view, sometimes heard, that balancing the federal budget by itself would largely defuse the current account issue. in particular, to the extent that a reduction in the federal budget resulted in lower interest rates, the principal effects might be increased consumption and investment spending at home rather than a lower current account deficit. indeed, a recent study suggests that a one - dollar reduction in the federal budget deficit would cause the current account deficit to

the united states. in 2050, for example, the number of retirees for each 100 working - age people in the united states should be about the same as in 2030, about 34, but the number of retirees per 100 working - age people is projected to increase to about 60 in the euro area and about 78 in japan. we see that many of the major industrial countries - particularly japan and some countries in western europe - have both strong reasons to save ( to help support future retirees ) and increasingly limited investment opportunities at home ( because workforces are shrinking and capital - labor ratios are already high ). in contrast, most developing countries have younger and more - rapidly growing workforces, as well as relatively low ratios of capital to labor, conditions that imply that the returns to capital in those countries may potentially be quite high. basic economic logic thus suggests that, in the longer term, the industrial countries as a group should be running current account surpluses and lending on net to the developing world, not the other way around. if financial capital were to flow in this " natural " direction, savers in the industrial countries would potentially earn higher returns and enjoy increased diversification, and borrowers in the developing world would have the funds to make the these data are from annex table 58, oecd economic outlook, vol. 76, 2004, p. 226. the latest year for which data are available is 2003 for germany and the united kingdom, 2002 for france, italy, and japan. china is an important exception to the generalization that developing countries have young populations. the country's fertility rate has declined since the 1970s, and its elderly dependency ratio is expected to exceed that of the united states by midcentury. capital investments needed to promote growth and higher living standards. of course, to ensure that capital flows to developing countries yield these benefits, the developing countries would need to make further progress toward improving conditions for investment, as i will discuss further in a bit. a second issue concerns the uses of international credit in the united states and other industrial countries with external deficits. because investment by businesses in equipment and structures has been relatively low in recent years ( for cyclical and other reasons ) and because the tax and financial systems in the united states and many other countries are designed to promote homeownership, much of the recent capital inflow into the developed world has shown up in higher rates of home construction and in higher home prices. higher home prices in turn