Regional President Speech

ECONOMIC OUTLOOK, THE DOLLAR AND THE INTERNATIONAL SITUATION Remarks of John J, Ba l l e s . President Federal Reserve Bank of San Francisco Meeting with International Bankers Association Santa Ba r b a r a , California November 18, 1983 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Thank you very much for inviting he here to speak with I you, Typically, limit the scope of my talks to a review OF ECONOMIC DEVELOPMENTS ON THE DOMESTIC FRONT, BUT WE HAVE BEEN REMINDED IN THE PAST YEAR THAT THE UNITED STATES HAS BECOME MUCH MORE INTEGRATED INTO THE WORLD ECONOMY AND, AS A RESULT, THAT OUR ECONOMIC FORTUNE IS INTERTWINED WITH THAT OF OTHER COUNTRIES, I WOULD THEREFORE LIKE TO TAKE THIS OPPORTUNITY TO DISCUSS BOTH THE BUSINESS OUTLOOK FOR THIS COUNTRY AND THE OPTIONS FOR MONETARY POLICY WITHIN AN INTERNATIONAL CONTEXT. The State of the Recovery Let me first say that all signs still indicate that we ARE IN THE MIDST OF A STRONG RECOVERY THAT BEGAN IN LATE 1982. A REVIEW OF THE RECENT BUSINESS AND FINANCIAL NEWS SUGGESTS THAT WE'VE ACCOMPLISHED A GREAT DEAL IN CLEARING THE ECONOMIC LANDSCAPE OF ONE OF OUR MOST SERIOUS PROBLEMS — INFLATION — ALTHOUGH, OF COURSE, THE JOB IS FAR FROM FINISHED, A COMPARISON OF TODAY'S INFLATION RATE WITH THE 1980 PEAK INFLATION RATE OF IS VERY INSTRUCTIVE, IN THE 1980 SUMMER OF THE TWELVE-MONTH RATE OF INCREASE IN CONSUMER 14.8 IN PRICES WAS PERCENT. CONTRAST, THE CURRENT TWELVE 3.8 60 MONTH RATE OF CHANGE IS PERCENT — A PERCENT 1980, REDUCTION FROM THE DECLINE IN THE INFLATION RATE AT THE WHOLESALE LEVEL, AS MEASURED BY THE PRODUCER PRICE Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 2 - - INDEX, IS EVEN MORE DRAMATIC -- CURRENTLY 1,4 PERCENT VERSUS 10,5 PERCENT IN 1980. The good news about inflation is bolstered by reports ON OTHER ASPECTS OF THE ECONOMY, THE INDEX OF LEADING ECONOMIC INDICATORS HAS BEEN MOVING UPWARD SINCE SEPTEMBER 1982, Since Ja n u a r y * it has scored a very impressive gain OF 9,0 PERCENT. REAL GNP GROWTH AT 9.7 PERCENT IN THE SECOND QUARTER OF THIS YEAR WAS THE STRONGEST IT HAS BEEN IN OVER TWO YEARS. AND ESTIMATES FOR THE THIRD QUARTER GNP 7.9 INDICATE THAT CONTINUED TO EXPAND AT A HEALTHY PERCENT RATE. EQUALLY GRATIFYING HAS BEEN THE PROGRESS ON THE JOB FRONT, AS THE UNEMPLOYMENT RATE TUMBLED OUT OF DOUBLE-DIGIT TERRITORY TO 8.8 PERCENT IN OCTOBER AND CIVILIAN EMPLOYMENT INCREASED BY ALMOST 2k MILLION BETWEEN May and Oc t o b e r . NATI ON At our Bank, we expect real GNP for the U.S. as a whole 6,0 1983 TO GROW CLOSE TO PERCENT DURING AND TO CONTINUE TO 5.0 1984, EXPAND AT ABOUT PERCENT IN ThIS IS AN EXPANSION LED AND SUSTAINED BY CONSUMER SPENDING, WHOSE STRENGTH REFLECTS THE SUBSTANTIAL IMPROVEMENT IN REAL CONSUMER INCOMES AND WEALTH RESULTING FROM THE DRAMATIC SLOWDOWN IN INFLATION, FROM LAST JULY'S TAX CUTS, AND FROM THE SPARKLING STOCK MARKET RALLY EARLIER THIS YEAR THAT BOOSTED THE VALUE OF HOUSEHOLDS' PORTFOLIOS, IN COMPARISON, PLANT AND 1983 EQUIPMENT SPENDING HAS GROWN ONLY MODESTLY IN BECAUSE Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis And OF THE CURRENT HIGH LEVELS OF EXCESS PLANT CAPACITY. NET EXPORTS — THE DIFFERENCE BETWEEN EXPORTS AND IMPORTS — HAVE ACTUALLY DECLINED BECAUSE OF THE STRONG EXCHANGE VALUE OF THE DOLLAR. EE£ERAL_HEEKITS AMD BlGH REAL INTEREST RATES The proximate cause of the weakness in net exports (and TO A LESSER EXTENT IN DOMESTIC INVESTMENT SPENDING) IS THE RELATIVELY HIGH LEVEL OF REAL INTEREST RATES — THAT IS, INTEREST RATES ADJUSTED FOR THE RATE OF INFLATION, Bui] AS MANY OBSERVERS HAVE POINTED OUT, THE REAL SOURCE OF THE PROBLEM — IN OTHER WORDS, THE CAUSE OF THESE HIGH REAL RATES ~ IS THE FEDERAL GOVERNMENT DEFICIT, The fiscal 1383 deficit of $195,3 billion amounted to APPROXIMATELY 85 PERCENT OF AVAILABLE NET SAVINGS FROM THE PRIVATE SECTOR AND THE SURPLUSES OF STATE AND LOCAL GOVERNMENTS, AND IS FORECAST TO BE IN THAT NEIGHBORHOOD FOR THE NEXT THREE YEARS AT LEAST, ThIS OBVIOUSLY LEAVES LITTLE ROOM FOR THE FINANCING OF PRIVATE INVESTMENT SPENDING, INCLUDING HOUSING AND OUR NET EXPORTS, WlTH A DEMAND FOR CREDIT THAT EXCEEDS THE AVAILABLE SUPPLY, INTEREST RATES HAVE BEEN BID UP AS THE MARKET'S WAY OF ALLOCATING CREDIT, AND PRIVATE DEMANDS HAVE BEEN CROWDED OUT, AS I MENTIONED, PART OF THE CROWDING OUT HAS TAKEN THE FORM OF A DETERIORATING FOREIGN ACCOUNT. SlNCE 1980, WE HAVE WITNESSED A DRAMATIC UPSURGE IN THE STRENGTH OF THE Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis n - - U.S. DOLLAR IN COMPARISON WITH FOREIGN CURRENCIES. THE DOLLAR'S AVERAGE VALUE AGAINST MAJOR CURRENCIES APPRECIATED 27 PERCENT BETWEEN 1980 AND MID-OCTOBER 1983. THE REAL VALUE OF THE DOLLAR, I.E., THE EXCHANGE RATE ADJUSTED FOR PRICE TRENDS IN THE U.S. AND ABROAD, HAS BEEN EQUALLY STRONG — MARKING A 28 PERCENT GAIN SINCE 1980. The dollar's strength is due largely to the financing REQUIREMENTS OF THE FEDERAL GOVERNMENT, WHICH HAVE BROUGHT HIGH REAL RATES AND, IN THEIR WAKE, A HIGH DEMAND FOR DOLLARS TO INVEST IN THE U.S. THESE FOREIGN INVESTMENT FUNDS HAVE BEEN WELCOMED BY MANY AS A DESIRABLE SUPPLEMENT TO U.S. SAVINGS, HELPING TO FINANCE U.S. BUDGET DEFICITS AND TO KEEP A LID ON FURTHER U.S. INTEREST RATE INCREASES. However, this ignores the other side of the coin — the ADVERSE IMPACT OF A STRONG U.S. DOLLAR ON THE EXPORT SECTOR. The STRONG U.S. DOLLAR HAS APPRECIABLY REDUCED THE COMPETITIVENESS OF U.S. EXPORTS IN WORLD MARKETS AND MADE IT EASIER FOR FOREIGN PRODUCERS TO SELL IN THE UNITED STATES. The UNFAVORABLE EMPLOYMENT AND OUTPUT EFFECTS RESULTING FROM DOLLAR APPRECIATION HAVE LED TO A RISING TIDE OF PROTECTIONIST SENTIMENT IN THE U.S. THAT THREATENS TO CAUSE MULTI-LATERAL TRADE RESTRICTIONS AND A REDUCTION IN WORLD trade. Several foreign governments have added their voices in protest, pointing to higher import bills that must be PAID FOR GOODS PRICED IN DOLLARS — MOST NOTABLY, OIL. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 5 - - The high U.S. dollar has also affected the ability of SOME FOREIGN COUNTRIES (PRIMARILY, GERMANY, FRANCE, AND Japan) to control their domestic monetary p o l i c y . Authorities in these countries might want to consider MONETARY EASE AND LOWER INTEREST RATES AS ONE WAY TO COUNTER DOMESTIC RECESSIONS. BUT THEY ALSO WANT TO PRESERVE THE EXTERNAL VALUE OF THEIR CURRENCY. BECAUSE MONETARY EASE PUTS DOWNWARD PRESSURE ON CURRENCY VALUES, THESE CENTRAL BANKS FACE A DIFFICULT TRADE-OFF. I Finally the United States, believe, needs to address HOW, IN EFFECT, IT IS USING ITS FOREIGN ACCOUNT TO FINANCE PART OF ITS GOVERNMENT DEFICITS. THE CAPITAL INFLOW FROM THE REST OF THE WORLD, CAUSED BY HIGH INTEREST RATES HERE, MEANS THAT THE SAVINGS FROM OTHER COUNTRIES ARE BEING TAPPED As TO FINANCE THE FEDERAL DEFICIT. CHAIRMAN PAUL VOLCKER HAS NOTED, THIS OUTCOME IS ESPECIALLY TROUBLESOME AT A TIME WHEN LESSER DEVELOPED COUNTRIES FACE A SERIOUS CAPITAL SHORTAGE. lM .J=D£_i)£Bi_ Problem Recent nobel prize winner Lawrence Klein noted the OTHER DAY THAT MOST OF THE BURDEN FOR STABILIZING THE ECONOMY HAS FALLEN ON MONETARY POLICY BECAUSE OF FAILURE TO GET THE FISCAL DEFICIT DOWN. THE FED, IN OTHER WORDS, HAS BEEN GIVEN THE UNENVIABLE TASK OF BOTH CONTINUING THE FIGHT AGAINST INFLATION, AND KEEPING THE CURRENT RECOVERY ON TRACK. At THE SAME TIME, THIS TWO-FOLD TASK HAS BEEN MADE Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 6 - - EVEN MORE DIFFICULT BY THE ON-GOING PROBLEM THAT LESSER DEVELOPED COUNTRIES (LDCs) ARE HAVING SERVICING AND REPAYING THEIR DEBT, Let me present some background before discussing the IMPLICATIONS OF THIS PROBLEM FOR MONETARY POLICY. ACCORDING to Federal Reserve d a t a , LDC co u n t r i e s , excluding OPEC $575 NATIONS, OWE APPROXIMATELY BILLION TO THE REST OF THE WORLD, Of THIS, ABOUT $285 BILLION IS OWED TO BANKS WORLD­ $100 U.S. WIDE, WITH BILLION OWED TO BANKS. FOR SOME BANKS, THEIR TOTAL FOREIGN LOAN EXPOSURE EXCEEDS THEIR CAPITAL. U.S. Both the and other leading creditor countries have STRONG SAFETY NETS UNDER THEIR BANKING SYSTEMS, AND CAN BE EXPECTED TO PURSUE APPROPRIATE MONETARY AND FISCAL POLICIES IN THE CASE OF A SERIOUS DEFAULT. NEVERTHELESS, SUCH A DEFAULT WOULD POSE UNAVOIDABLE RISKS TO FINANCIAL AND ECONOMIC STABILITY, BOTH HERE AND ABROAD. IN SHORT, NO ONE CAN DENY THE SERIOUSNESS OF THE PROBLEM WE HAVE HERE. HOWEVER, WE NOW HAVE A MUCH BETTER UNDERSTANDING OF THE NATURE OF THE PROBLEM WHICH SHOULD ALLOW US TO DEAL WITH IT EFFECTIVELY. IN MY VIEW, A WORKABLE SOLUTION REQUIRES TWO KEY ELEMENTS. AN INDISPENSABLE FIRST STEP MUST BE DETERMINED ACTION BY MAJOR BORROWING COUNTRIES TO REDUCE EXTERNAL DEFICITS BY CUTTING INFLATION AND BUDGET DEFICITS AND ESTABLISHING REALISTIC EXCHANGE RATES AND DOMESTIC INTEREST RATES. THE INTERNATIONAL MONETARY FUND WILL PLAY AN IMPORTANT ROLE IN Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 7 . - THIS STEP, BOTH HELPING DEBTOR COUNTRIES TO FASHION THESE PROGRAMS, AND MONITORING THEIR SUCCESS, A SECOND KEY ELEMENT IS THE WORKING OUT OF ARRANGEMENTS AMONG BANK CREDITORS TO PROVIDE CONTINUING CREDIT SO THAT THE DEBTOR'S ADJUSTMENT PROGRAMS HAVE THE OPPORTUNITY TO WORK, The FACT IS THAt FEW COUNTRIES ARE IN A POSITION TO REPAY INDEBTEDNESS RAPIDLY, An ORDERLY SOLUTION TO THE LDC DEBT PROBLEM THEREFORE IS LIKELY TO REQUIRE "ROLL-OVERS" OF CURRENT AND FUTURE MATURITIES, AND EXTENSIONS OF BANK CREDIT. The SITUATION WE FACE HERE IS A CLASSIC EXAMPLE OF WHAT ECONOMISTS WOULD CALL AN "EXTERNALITIES PROBLEM", Specifically, an individual bank may perceive it is in its NARROW INTEREST TO WITHDRAW FROM LENDING, BUT IN FACT IT IS As NOT, IF OTHER BANKS ARE OF THE SAME MIND, CHAIRMAN VOLCKER NOTED IN CONGRESSIONAL TESTIMONY EARLIER THIS YEAR, "REFUSAL OF BANKS TO PARTICIPATE IN SUCH rRESTRUCTURING) PROGRAMS COULD UNDERMINE THEIR COMMON INTEREST IN MAINTAINING THE SERVICING AND ULTIMATELY COLLECTABILITY OF EXISTING CREDITS." The Ro le .qf the .Federal. I eserve. The Federal Re s e r v e , as well as the U.S. Exchange Stabilization Fu n d , has participated in providing short-term "bridging" credits in instances where immediate liquidity REQUIREMENTS OF A DEBTOR COUNTRY CLEARLY THREATENED INTERNATIONAL FINANCIAL STABILITY. THESE INVOLVEMENTS HAVE Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 8 - - BEEN LIMITED AND BRIEF, HOWEVER, BECAUSE A CENTRAL BANK HAS NEITHER THE CAPACITY NOR MANDATE TO SUBSTITUTE ITS CREDIT FOR PRIVATE LENDING IN SUCH SITUATIONS. IN THE REGULATORY AND SUPERVISORY AREA, THE FEDERAL Reserve has worked with other federal banking agencies to U.S, STRENGTHEN THE BANKING SYSTEM SO THAT IT CAN CONTINUE TO PERFORM ITS VITAL ROLE IN HELPING SOLVE THE LDC DEBT PROBLEM, WHILE PROTECTING FINANCIAL AND MONETARY STABILITY AT HOME. AS YOU KNOW, THE FEDERAL RESERVE AND THE COMPTROLLER OF THE CURRENCY HAVE ESTABLISHED A MINIMUM CAPITAL GUIDELINE FOR PRIMARY CAPITAL OF 5 PERCENT FOR LARGE U.S. U.S. BANKS THAT CONDUCT MOST OF THE INTERNATIONAL BANKING BUSINESS, As A GROUP, THESE BANKS HAVE MADE IMPRESSIVE IMPROVEMENTS IN THEIR CAPITAL POSITIONS IN THE PAST TWO YEARS, AND ALMOST ALL OF THE BANKS WITHIN THIS GROUP NOW EXCEED THE MINIMUM GUIDELINES. The Federal Reserve has sought to promote the ACHIEVEMENT OF THESE GUIDELINES, AMONG OTHER WAYS, BY INCLUDING THEM IN THE CRITERIA IT CONSIDERS FOR REGULATORY APPROVAL OF MAJOR ACQUISITIONS. A RECENT CASE IN POINT WAS THE APPLICATION OF BANKAMERICA CORPORATION TO ACQUIRE Seafirst Cor p o r a t i o n . In approving the ap p l ic ati on , the Board of Governors noted that expansions of large multi­ national BANKING ORGANIZATIONS SHOULD BE CONSISTENT WITH AN ADEQUATE CAPITAL POSITION. THUS, IN THE SEAFIRST ACQUISITION, THE BOARD SECURED A WRITTEN COMMITMENT FROM Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 9 - - BankAm e r ica Corporation indicating its intention to secure a 5 PERCENT PRIMARY CAPITAL RATIO WITHIN TWELVE MONTHS, IN THE LAST FEW MONTHS, SEVERAL OBSERVERS HAVE ASKED WHETHER THE SAME SORT OF CONDITIONS OUGHT TO BE APPLIED TO SEVERAL PROPOSED MAJOR U.S. ACQUISITIONS BY FOREIGN BANKING ORGANIZATIONS, THESE OBSERVERS NOTE THAT UP TO NOW U.S. REGULATORY POLICY HAS ALLOWED SUCH ACQUISITIONS TO TAKE PLACE SO LONG AS THE FOREIGN BANK'S CAPITAL LEVEL WAS IN LINE WITH ITS COUNTRY PEERS, AND AS LONG AS IT AGREED TO MAINTAIN ADEQUATE LEVELS OF CAPITAL IN ITS U.S. BANK U.S. SUBSIDIARY, THE RESULT WAS A SERIES OF ACQUISITIONS OF BANKS BY FOREIGN BANKS WITH CAPITAL LEVELS OFTEN WELL BELOW U.S. THOSE REQUIRED OF BANKS, EVEN AFTER MAKING GENEROUS ALLOWANCES FOR DIFFERENT ACCOUNTING PRACTICES. IN THE ENVIRONMENT WHERE U.S. BANKS ARE BEING PRESSED TO MEET MINIMUM CAPITAL REQUIREMENTS, IT SEEMS TO ME TO BE LEGITIMATE, BOTH ON GROUNDS OF PRUDENCE AND EQUITY, TO EXAMINE WHETHER THIS POLICY SHOULD BE REVISED. In MY OPINION, THIS QUESTION IS NOT GOING TO GO AWAY AND WILL RECUR WITH INCREASING FREQUENCY AND INSISTENCY IN THE FUTURE, Monetary Policy and the Th i r d Wq.rld. U.S. Finally let me say a little about monetary policy LDC AND THE DEBT PROBLEM. I REFERRED EARLIER TO SOME OF THE U.S. PROBLEMS CAUSED BY HIGH INTEREST RATES IN THE ONE POINT I DID NOT MENTION WAS THAT INTEREST RATES ON A Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 10 - - SIGNIFICANT PART OF LDC LOANS ARE TIED TO U.S. INTEREST rates. The Organization for Economic Cooperation and Development estimates that these floating-interest loans AVERAGED $155 BILLION IN 1982 FOR NON-0PEC DEVELOPING countries. Of this amount, four countries ~ Argentina, $140 Brazil, South Korea and Mexico ~ accounted for BILLION, OR 84 PERCENT OF THE TOTAL. High U.S. interest rates therefore exacerbate the LIQUIDITY PROBLEMS FACED BY THESE COUNTRIES AT A PARTICULARLY VULNERABLE TIME, ECONOMISTS ON MY STAFF HAVE 100 200 ESTIMATED THAT AN INCREASE OF TO BASIS POINTS IN THE Federal Funds rate would boost the net debt service REQUIREMENTS OF NON-0PEC DEVELOPING COUNTRIES A MINIMUM OF $1.7 $3.4 TO BILLION ON AN ANNUAL BASIS. The Fed has come under pressure periodically to allow MONEY TO GROW MORE RAPIDLY, WHICH, IT IS ARGUED, WOULD HELP LDC COUNTRIES BY PUSHING DOWN INTEREST RATES HERE IN THE U.S. Such a policy, in my estimation, would produce only IT TEMPORARY GAINS AT BEST. MIGHT INITIALLY LOWER INTEREST RATES AND EASE THE DEBT SERVICE COSTS OF LESSER DEVELOPED COUNTRIES, BUT THIS TEMPORARY RESPITE ULTIMATELY WOULD BE UNDONE BY EVEN HIGHER INTEREST COSTS FOR AN EXTENDED PERIOD, AS INFLATION PICKS UP AGAIN AND INTEREST RATES RISE TO INCORPORATE A HIGHER "INFLATION PREMIUM". IN SHORT, THERE ARE NO GROUNDS FOR BELIEVING THAT AN LDCS INFLATIONARY POLICY HERE WOULD HELP THE ANY MORE THAN Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - ii - IT WOULD HELP US. FAR FROM IT — THE ULTIMATE RESULT WOULD BE HARMFUL FOR EVERYONE. At THE SAME TIME, WE NEED TO RECOGNIZE THAT A LASTING SOLUTION TO THE LDC DEBT PROBLEM DEPENDS ON SUSTAINING THE ECONOMIC RECOVERY, BOTH HERE AND IN OTHER INDUSTRALIZED NATIONS, OTHERWISE, LDC DEBTOR NATIONS WOULD FACE AN EROSION OF THEIR CAPACITY TO SERVICE DEBT AS FALLING EXPORT SALES CUT INTO THEIR FOREIGN EXCHANGE EARNINGS, This POINT IS WORTH EMPHASIZING BECAUSE THE U.S. ECONOMY IS AN IMPORTANT MARKET FOR MANY OF THE MAJOR LESSER DEVELOPED DEBTOR COUNTRIES. It ACCOUNTED, FOR EXAMPLE, FOR 55.1 PERCENT OF MEXICO'S MERCHANDISE EXPORTS AND 20.5 PERCENT OF BRAZIL'S IN 1982. TO MY MIND, THE BEST MONETARY POLICY THAT WE CAN PURSUE IS THE ONE WE HAVE IN FACT BEEN FOLLOWING. IT CONSISTS OF TIMELY AND MODERATE ADJUSTMENTS TO THE GROWTH IN THE MONEY AGGREGATES TO KEEP THEM ON TRACK, AFTER ALLOWING FOR CHANGES IN THE RATE OF TURNOVER OF MONEY. THIS POLICY HAS PROBABLY THE BEST CHANCE OF MAINTAINING A SUSTAINED NON-INFLATIONARY ECONOMIC EXPANSION IN THE U.S. AND, IN TURN, OF HELPING TO LAY THE GROUNDWORK FOR A LONG-TERM SOLUTION TO THE PROBLEMS OF INTERNATIONAL LENDING. TO SUM UP, WE CAN BE THANKFUL FOR HAVING BROKEN BOTH THE UPWARD SPIRAL OF INFLATION AND THE DOWNWARD SPIRAL OF RECESSION DURING THE PAST YEAR. THE RECOVERY FROM ONE OF THE WORST RECESSIONS IN RECENT HISTORY SHOWS EVERY SIGN OF Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 12 - CONTINUING, THOUGH HIGH GOVERNMENT DEFICITS CONTINUE TO RAISE CONCERNS ABOUT THE LONGER-TERM PROSPECTS FOR ECONOMIC GROWTH. ON THE INTERNATIONAL FRONT, PROGRESS IN SOLVING THE LDC DEBT PROBLEM HAS BEEN MIXED. POLITICAL UNCERTAINTIES IN Brazil and Argentina make it difficult to assess at this TIME THE PROSPECTS FOR RESOLUTION OF THEIR PROBLEMS. Me x i c o , pe rhap s, provides the best example of some measure of s u c e s s . A drastic devaluation of the peso STOPPED THE serious capital flight from Mexico that threatened to undo ALL OF ITS EFFORTS TO RESOLVE ITS DIFFICULTIES. At THE SAME TIME, THE DEVALUATION TURNED THE CURRENT ACCOUNT AROUND FROM As A SUBSTANTIAL DEFICIT TO A HEALTHY SURPLUS. A RESULT, DESPITE CONTINUING HIGH INFLATION AND A SEVERELY DEPRESSED ec onom y, Mexico has been able to continue to attract SUFFICIENT FOREIGN FUNDS TO REPAY ITS DEBTS AS THEY COME DUE. Against the background of these developments the Federal Re s e r v e 's on -going strategy of promoting a su stained , non-inflationary recovery offers the BEST hope of establishing a climate favorable to the ultimate solution of the LDC debt p r o b l e m . Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

John J. Balles (1983, November 17). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_19831118_john_j_balles

@misc{wtfs_regional_speeche_19831118_john_j_balles,
  author = {John J. Balles},
  title = {Regional President Speech},
  year = {1983},
  month = {Nov},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_19831118_john_j_balles},
  note = {Retrieved via When the Fed Speaks corpus}
}