sustained current account surpluses, hold substantial international reserves in the form of treasuries. foreign holdings of u. s. treasury securities currently amount to about $ 5 - 1 / 2 trillion, roughly half of the total amount of marketable treasury debt outstanding. the global economic and financial stresses of recent years – triggered first by the financial crisis, and then by the problems in the euro area – appear to have significantly elevated the safe - haven demand for treasury securities at times, pushing down treasury yields and implying a lower, or even a negative, term premium. 9 federal reserve actions have also affected term premiums in recent years, most prominently through a series of large - scale asset purchase ( lsap ) programs. these programs consist of open market purchases of agency debt, agency mortgage - backed securities, and longerterm treasury securities. to the extent that treasury securities and agency - guaranteed securities are not perfect substitutes for other assets, federal reserve purchases of these assets should lower their term premiums, putting downward pressure on longer - term interest rates and easing financial conditions more broadly. although estimated effects vary, a growing body of research supports the view that lsaps are effective at bringing down term premiums and thus reducing longer - term rates. 10 of course, the federal reserve has used this unconventional approach to lowering longer - term rates because, with short - term rates near zero, it can no longer use its conventional approach of cutting the target for the federal funds rate. 11 accordingly, this portion of the decline in the term premium might ultimately be attributed to the sluggish economic recovery, which prompted additional policy action from the federal reserve. let ’ s recap. long - term interest rates are the sum of expected inflation, expected real shortterm interest rates, and a term premium. expected inflation has been low and stable, reflecting central bank mandates and credibility as well as considerable resource slack in the major industrial economies. real interest rates are expected to remain low, reflecting the weakness of the recovery in advanced economies ( and possibly some downgrading of longer - term growth prospects as well ). this weakness, all else being equal, dictates that monetary policy must remain accommodative if it is to support the recovery and reduce disinflationary risks. put another way, at the present time the major industrial economies apparently cannot sustain significantly higher real rates of return ; in that respect, central banks – so long as they are meeting their price stability mandates – have

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.