. i begin with a simple identity, taken from the national income accounts : ns = s - bd = i - b the left side of this identity covers the sources of national saving ( ns ), which are private saving in the economy ( s ) less budget deficits ( bd ). budget deficits are subtracted because budget deficits imply that private saving is in part going to pay for the deficits of the government and not going into private investment. the more interesting part of the equation involves the uses of national saving, given on the right side of the identity. in an economy closed to international trade and capital flows, the long - time staple of undergraduate macroeconomics classes, national saving equals just domestic investment ( i ), which is spending on new capital equipment. this is the spending that raises productivity and output in the long run, and for that reason it is of special interest. but since economies are now open to international trade and capital flows, the identity must also account for the portion of national saving lent abroad or the portion of investment financed by borrowing from abroad ( b ). this is done by deducting b, essentially the nation's current account deficit ( through another accounting identity of which i will spare you discussion ). one value of writing out the national saving identity is to bring out an important short - run, long - run dichotomy. in the short - run, international borrowing can go up or down depending on cyclical movements, exchange rates, and a host of other factors. very few countries do without any international borrowing or lending in a particular year. but over a longer period of time international borrowing kept close to zero stabilizes a country's ratio of international obligations to its gross domestic product ( gdp ). 1 when this liability ratio is stable, a nation's saving is implicitly financing most of its domestic investment. persistent borrowing, keeping investment above saving, may be possible, but it is not common, and in any case it automatically implies a buildup of international liabilities relative to its national output. if a nation wants to have its investment and not pay increasing shares of income in interest or dividends, it has to finance this investment by its own national saving. or, turning the equation around, high national saving will raise future living standards whether it finances investment directly or reduces international borrowing. a further value in writing out the identity is to tie all this to budget and current account deficits, which are the focus

brian p sack : managing the federal reserve ’ s balance sheet remarks by mr brian p sack, executive vice president of the markets group of the federal reserve bank of new york, at the 2010 chartered financial analyst ( cfa ) institute fixed income management conference, newport beach, california, 4 october 2010. * * * it is a pleasure to be here today to discuss the management of the federal reserve ’ s balance sheet. the federal reserve currently holds more than $ 2 trillion of securities in its portfolio, making it a key participant in u. s. fixed - income markets. moreover, the portfolio is managed in a manner that differs from any other market participant, as the federal open market committee ( fomc ) has adjusted the size and composition of the portfolio with the intention of achieving its monetary policy objectives of full employment and price stability. thus, it is important for market participants to understand the balance sheet decisions of the fomc and the implementation of those decisions to fully assess the implications for fixedincome markets. the evolution of the balance sheet going forward will depend on how the economic outlook unfolds. the current forecasts of fomc members show the economy moving in the right direction, with a sustained recovery in gdp, a gradual reduction in the unemployment rate over time, and an increase in inflation towards the level that fomc members see as desirable over the intermediate term. however, the anticipated recovery is relatively tepid and thus delivers only slow progress toward meeting the federal reserve ’ s dual mandate. indeed, according to their most recently published forecasts, most fomc members expect the unemployment rate to remain above 8. 25 percent through 2011 and the inflation rate to remain below its mandate - consistent level through 2012. in addition, the economy remains vulnerable to downside surprises that could take both output and inflation further away from the fomc ’ s objectives. the sluggish outlook for the economy and the risks that surround that outlook have raised the possibility of further monetary policy accommodation. the most recent fomc statement indicated that the committee “ is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate. ” the fomc has several policy tools that it could use to achieve more accommodative financial conditions, as chairman bernanke discussed in his speech at the jackson hole symposium in august. my remarks today will focus on one of those options – changing the size of the federal