##tantial, and some statistical evidence is suggestive that the historically large current account deficit of the united states may be part of a broader set of rising unconsolidated cumulative deficits of individual economic entities will increase net debt, i. e., gross debt less financial assets. but in the large majority of instances gross debt will rise with net debt. part of this rise possibly reflects a growing proportion of income generated by gdp accruing to debtors. in recent decades, however, the proportion of economic units with no debt has been relatively small. nominal gdp, of course, is net valueadded and is not affected by consolidations of accounts. there is no necessary reason, of course, why such trade need be imbalanced. deficits and accumulated debt that is arguably more secular than cyclical. the secular updrift in deficits and debt doubtless has been gradual. however, the component of those broad measures that captures the share of net foreign financing of the balances of individual unconsolidated u. s. economic entities - - our current account deficit - - has increased from negligible in the early 1990s to more than 6 percent of our gdp today. the acceleration of u. s. productivity, which dates from the mid - 1990s, was an important factor in this process. accordingly, it is tempting to conclude that the u. s. current account deficit is essentially a byproduct of long - term secular forces, and thus is largely benign. after all, we do seem to have been able to finance our international current account deficit with relative ease in recent years. but does the apparent continued rise in the deficits of u. s. individual households and nonfinancial businesses themselves reflect growing economic strain? ( we do not think so. ) and does it matter how those deficits of individual economic entities are being financed? specifically, does the recent growing proportion of these deficits being financed, net, by foreigners matter? if economic decisions were made without regard to currency or cross - border risks, then one could argue that current account imbalances were of no particular economic significance, and the accumulation of debt would have few implications beyond the solvency of the debtors themselves. whether the debt was owed to domestic or foreign lenders would be of little significance. but national borders apparently do matter. debt service payments on foreign loans, for example, ultimately must be funded disproportionately from exports of

appear to be at the root of our most recent breakdowns in mexico and asia. their increased prevalence may, in fact, be a defining characteristic of the new high - tech international financial system. we shall never be able to alter the human response to shocks of uncertainty and withdrawal ; we can only endeavor to reduce the imbalances that exacerbate them. while, as indicated earlier, i do not believe we are as yet sufficiently knowledgeable of the full complex dynamics of our increasingly developing high - tech financial system, enough insights have been gleaned from the crises in mexico and asia ( and previous experiences ) to enable us to list a few of the critical tendencies toward disequilibrium and vicious cycles that will have to be addressed if our new global economy is to limit the scope for disruptions in the future. these elements have all, in times past, been factors in international and domestic economic disruptions, but they appear more stark in today ’ s market. 1. leverage certainly in korea, probably in thailand, and possibly elsewhere, a high degree of leverage ( the ratio of debt to equity ) appears to be a place to start. while the key role of debt in bank balance sheets is obvious, its role in the efficient functioning of the nonbank sector is also important. nevertheless, exceptionally high leverage often is a symptom of excessive risk taking that leaves financial systems and economies vulnerable to loss of confidence. it is not easy to imagine the cumulative cascading of debt instruments seeking safety in a crisis when assets are heavily funded with equity. the concern is particularly relevant to banks and many other financial intermediaries, whose assets typically are less liquid than their liabilities and so depend on confidence in the payment of liabilities for their continued viability. moreover, both financial and nonfinancial businesses can employ high leverage to mask inadequate underlying profitability and otherwise have inadequate capital cushions to match their volatile environments. excess leverage in nonfinancial business can create problems for lenders including their banks ; these problems can, in turn, spread to other borrowers that rely on these lenders. fortunately, since lending by nonfinancial firms to other businesses is less prevalent than bank lending to other banks, direct contagion is less likely. but the leverage of south korea ’ s chaebols, because of their size and the pervasive distress, has clearly been an important cause of bank problems with their systemic implications. 2. interest rate and currency