another to the dollar. together these forces have produced larger imbalances — deficits here and surpluses abroad — that have been sustained longer and financed more easily than conventional wisdom would have thought possible a decade or even five years ago. why does this pattern of imbalances matter and why should it concern us? it matters because of the size of the u. s. imbalance. our current account deficit is now running at a rate of above 6 percent of gdp, a level without precedent for a major economy. it matters because of the composition of the imbalance. our trade deficit is now roughly the size of the current account deficit, and very large relative to our export base. and our net investment income balances are now likely to move into deficit. it matters because of the trajectory of the u. s. imbalance. on reasonable assumptions about its likely near term path, this deficit will produce a very large net deterioration in our net external liabilities relative to national income, with progressively larger net transfers of income to the rest of the world. this pattern should concern us because it is not simply the result of the savings and investment decisions of the private sector. the fact that we are using a substantial part of the savings we are borrowing from the rest of the world to finance an unsustainable level of public borrowing leaves us more vulnerable than if those savings were being used for productive private investment. large structural fiscal deficits limit the size of the sustainable external imbalance for any country, even the united states, and they necessarily increase concern about the terms on which we are likely to finance the present imbalance. 1 / 3 it should concern us because of how the imbalance has been financed. a substantial portion of the capital inflows that finance our current account deficit has come from foreign central banks — which have been accumulating dollar reserves to preserve exchange rate arrangements that are unlikely to be sustainable and are already in the process of change. the impact of a reduction in the scale of official accumulation of dollar assets could be fully offset by increases in purchases by private investors. but even in the context of a continued high degree of confidence in the relative return on claims on the united states, it is hard to know with confidence how the preferences of private savers might respond to the process of gradual evolution in their nation ’ s exchange rate regimes now underway. and most importantly, perhaps, these imbalances matter because at some point they will have to reverse. market forces will at

such as extreme weather in parts of the world – and on the demand side, including the well - documented, rapidly growing food demands of emerging economies. in addition to anticipated strong future demand for agricultural commodities, there is another factor affecting these prices : exceptionally low interest rates. as a bank regulator in the 1980s, responsible for financial institutions in nebraska, kansas, oklahoma, missouri, wyoming, colorado and new mexico, i witnessed the devastating effects of easy credit and leverage in agriculture, real estate and energy. we closed or assisted nearly 350 banks in our region alone. with interest rates near zero and with additional massive liquidity poured into our economy, all interest rates are affected. therefore, asset values of every kind are also being affected, bis central bankers ’ speeches including land values in iowa. loans for land are available at rates well below historical levels – in some instances, 400 basis points below historical averages. the effect on land assets, like any asset, is to artificially boost its value. and there is ample experience that tells us that if rates were to rise quickly, this would affect world demand for commodities and raise the cost of capital on land almost instantly. when – not if – the adjustment occurs, we will see a dramatic drop in values. in the meantime, if operators and speculators have incurred large amounts of debt, then a new crisis will emerge. finally, we know that a crisis can affect more than one segment of the economy. it nearly always affects the broad economy and employment. shortcuts don ’ t work. we need to focus on the real economy. we need to focus on real reform. conclusion my point today is simply that as powerful as monetary policy is, it sometimes is not enough. it cannot ensure an economy that balances its savings and investing needs. it by itself cannot correct our current account deficit or enhance savings and investment. these will require important changes in our real economy. providing the right environment in which government can play its role in supporting business and the consumer to save, invest, manufacture and service national and global needs in the end will create real income and wealth. we need to focus on long - term, stable monetary policy and fiscal policy goals that support these broader goals. having seen the effects of financial crisis after financial crisis as shortterm policies beget short - term policies, we should know that an ever - present short - run focus, even if well intentioned, is the road to ruin. bis central bankers ’ speeches