##nowable shocks will surely intervene along the way. my assignment is not to evaluate how much confidence we should have in projected surpluses or to assess the merits of alternative allocations of projected surpluses. rather, my assignment is to connect fiscal and monetary policy decisions. i have emphasized the value of evaluating fiscal policy options in models that incorporate reasonable monetary policy reaction functions. doing so builds in the indirect response of monetary policy to fiscal policy changes, consistent with the logic of the policy mix. this is, in effect, the approach i followed in my discussion of the analytics of the policy mix by assuming that monetary policy is reset - albeit indirectly - in response to a change in fiscal policy. retaining the projected non - social security surplus in the cbo baseline is one alternative. the other options involve increased fiscal stimulus and, as a result, will be accompanied, ceteris paribus, by a higher equilibrium real interest rate in the long run. they would also likely result in a lower share of investment in output and a higher current account deficit than the option that preserves higher surpluses. the specific outcomes will depend on the details, especially on the nature of supply - side incentives in any spending or tax changes. ceteris paribus, monetary policy - run off a sensible reaction function - will end up validating the higher equilibrium real interest rate, to keep prices from accelerating indefinitely. the implications of debt retirement for monetary policy operations one additional consequence of the choice among these options is that preserving the surpluses would lead to a gradual decline in and ultimately the retirement of the federal government debt. the prospects for such an outcome depend, of course, on the realized growth rate of income and hence tax revenue and one ’ s assumption about the starting base of expenditures and the appropriate baseline for its rate of growth. i have already noted that such an outcome should not be viewed as a foregone conclusion. and, even if the treasury debt were to be fully retired, that outcome would be likely to be transitory. once the baby boomers begin to retire, the social security trust fund will be progressively run down, and at some point, the overall budget will likely move from surplus to deficit again. today, treasury securities account for the bulk of the federal reserve ’ s portfolio of assets. treasury securities are a convenient and natural choice for the federal reserve ’ s portfolio because they pose no credit risk and because the depth and liquidity of the treasury market facilitate open market operations. although the treasury

will talk briefly on the niu ailan savings and loan society. i have to first of all express my condolences on the passing of the founding chairman of the society, the late mr. greg luka. under his stewardship, the society has grown to become one of the success stories. the new ireland provincial government was the promoter of the establishment of the niu ailan savings and loan society, with a cash donation of k50, 000 when it was registered in march 1995. annual grants of k50, 000 from the provincial government were given in 1995 and 1996, and in kind up until april 2002. the success of the society is shown in its membership, which grew from 167 in march 1995 to 5, 754 at the end of june 2004. as i ’ ve already mentioned, membership is open to all new irelanders living in or outside the province. so stephen, if you decide to migrate to australia or fiji, you can still be a member. the only hitch is your deposits mus t be paid in kina ( not dollars ). oh, i also doubt if the society will accept deposits in mis either, but kina and toea, they will accept. the society is also in a financially strong and viable position. as at the end of june 2004, total assets of the soc iety were k6. 5 million, while total deposits and liabilities were k5. 3 million and k5. 5 million, respectively. total loans amounted to k2. 8 million. the success of the society is based on good management and sound business practice, and i have acknowle dged the stewardship of the late greg luka in this area. this prudent management and good corporate governance will have to continue for the society to maintain its satisfactory performance. we have also created a microfinance unit in the bank to deal with microfinance issues. early this year, we launched the wau microbank in the morobe province. microfinance is an area of increased interest and we are considering appropriate legal framework to oversee this industry. we are all familiar with the illegal money schemes or pyramid schemes. the central bank continues to work with the law enforcing agencies to stamp up these illegal schemes, which have created financial problems for many of our people. we have taken out advertisements listing the licensed financial institutions and warning the public on the illegal schemes. we need the public ’ s support - your support - to help us