of the countries themselves. in particular, more flexible exchange rates will help domestic demand fill in the gap left once foreign demand falls back to a more sustainable level. more flexible exchange rates also provide domestic policymakers greater scope to focus on domestic goals of full employment and price stability. it is worth underscoring that even if authorities around the world aggressively undertake structural reforms that ameliorate current global imbalances, these actions will not preclude the emergence of large current account surpluses and deficits in the future. but the emergence of such imbalances should not necessarily be worrisome. as i noted earlier, in a world where different economies are periodically buffeted by different types of shocks, some of which may be quite persistent, cross - country dispersion in external balances is a perfectly natural way of smoothing the effects of these shocks over time. what is important is to ensure that international capital flows do not combine with other weaknesses in the financial system to lay the groundwork for some future global crisis. consequently, we need to work simultaneously on rebalancing global demand and strengthening the structure, operation, and governance of financial systems. neither task is easy, but both are essential to a more stable world than the one we have experienced over the past few years.

protected by the rule of law and have been a safe haven in times of stress. the globalization of financial markets and the increased willingness of investors to look beyond their own borders for opportunities may well have facilitated the transfer of savings needed to sustain the u. s. current account deficit. in that regard, both the pull of global demands for our assets as well as the push of our needs to finance our trade imbalance explains the current conjuncture. foreign official holdings of dollar assets also have risen substantially, especially in asia. governments there apparently read one lesson of the financial crisis of the 1990s as the need for a large war chest of reserves. in addition, against the backdrop of very high private saving rates, they may be concerned about their ability to generate sufficient domestic demand to provide employment opportunities, in some cases for the growing numbers of people who want to shift from agriculture to higher productivity jobs often in urban areas. although private and government demands for dollar assets have allowed the u. s. current account deficit and foreign surpluses to persist, these imbalances are not sustainable indefinitely. in the united states, both public and private saving will need to rise to meet the oncoming needs of an aging population. at some point, risk - adjusted returns on investments in the rest of the world will begin to look favorable relative to holding dollar assets. dollar assets are becoming an increasing proportion of non - u. s. portfolios ; this can continue for a time, but not forever. at some point, the united states is going to need to finance its imports with the proceeds of its exports, not with foreign saving. experience with current account adjustments by industrialized economies - for example, by the united states in the 1980s - suggests that the transition to a more sustainable configuration is not likely to be disruptive. but we cannot be sure, particularly because the u. s. experience is unique given the dollar ’ s role as a reserve currency and americans ’ relatively favorable returns on assets held abroad. the world economy is in uncharted territory with regard to the size of the imbalances. various asset markets have experienced rather sharp fluctuations in prices in recent decades, some of which have threatened disruption in the united states and have contributed to sluggish growth elsewhere, as in japan following the real estate boom and bust ; we certainly cannot rule out the possibility of further sharp asset price movements as product prices and spending adjust. recent research reinforces the common - sense conclusion that no single policy or private action