Speech

Panel Discussion on Challenges for U.S. Businesses GrowingGlobal2004 WorldTradeCenterSaintLouis St.Louis,Missouri September10,2004 Iam pleased to be here today to participate ResearchDivision,fortheirassistance,butIretain in the Growing Global 2004 program. The fullresponsibilityforerrors. World Trade Center Saint Louis serves an importantfunctioninpromotingthedevel- opment of international business in our region. TRADE FLOWS AND CAPITAL Aswithmosteconomists,Iamastrong FLOWS advocateoffreerinternationaltrade.Whydoes Acountry’scurrentandcapitalaccountsare tradematterandwhyistheWorldTradeCenter clearlyverycloselyrelated.Theflowsofgoods, St.Louisimportant?Tradeprovidestheincentives servicesandincomeflowsoncapitalthatcom- forefficientallocationofresourcesinternation- prisethecurrentaccounttellonlypartofthestory allyandisakeyfeatureofanenvironmentthat ofacountry’sinternationaleconomicrelations. encourageseconomicgrowth. I’mgoingtoconcentrateonthecapitalaccount I’llfocusmyremarksontheaggregatebalance becausethatpartoftheinternationaleconomic ofpaymentspositionoftheUnitedStates.Indis- storyiscommonlyneglected. cussingtrade,itisusefultoconsiderthebroad Itisamistaketotreatinternationalcapital conceptofthecurrentaccount,whichincludes flows,asmanydo,asthoughtheyarepassively currentearningsoncapitalaswellastradein respondingtowhatishappeninginthecurrent goodsandservices.Acorrespondingaccounton account.Thetradedeficit,somesay,is“financed” theothersideoftheledger,knownasthe“capital byU.S.borrowingabroad.Infact,investorsabroad buyU.S.assetsnotforthepurposeoffinancing andfinancialaccount,”measuresflowsofcapital theU.S.tradedeficitbutbecausetheybelieve assetsinternationally.Puttingasideerrorsand thesearesoundinvestmentspromisingagood omissionsinthedata,acurrentaccountdeficit combinationofsafetyandreturn.Manyofthese isnecessarilyequaltoacapitalaccountsurplus. investmentshavenothingwhatsoevertodowith Acountryinthisposition—liketheU.S.today— borrowingintheconventionalmeaningofthe isexportingmorecapitalclaimsthanitisimport- word,butinsteadinvolvepurchasesofland, ing.Myprincipalthemeisthatacapitalaccount businesses,andcommonstockintheUnited surplusisevidenceofeconomicstrength. States.Foreignautocompanies,forexample, Beforeproceeding,Iwanttoemphasizethat havepurchasedlandandbuiltmanufacturing theviewsIexpressherearemineanddonot plantsintheUnitedStates.Thesesimpleexam- necessarilyreflectofficialpositionsoftheFederal plesshouldmakeclearthatacarefulanalysisof ReserveSystem.Ithankmycolleaguesatthe thenatureofinternationalcapitalflowsisneces- FederalReserveBankofSt.Louis,especially sarybeforeofferingjudgmentsabouttheU.S. MichaelR.Pakko,senioreconomistinthe externalimbalance. 1 MISCELLANEOUS Astradeandcommercearoundtheworld jointlydetermined,itisworthemphasizingthat havegrownincreasinglyintegrated—theprocess capitalflowsareahighlydynamicfeatureofthe oftenreferredtoas“globalization”—thegrowth worldeconomy.Changesininvestorattitudes ofcross-borderfinancialflowshasbecomepar- andexpectationscanaltercapitalflowsquickly ticularlyprominent.Since1990,foreign-owned andforcechangesinthetradeaccount.Fromthis U.S.assetsincreasedfromlessthan$2.5trillion perspective,capitalaccountadjustmentcanplay toapproximately$10trillionattheendof2003— animportantindependentrolethatisdetermined afourfoldincrease.Capitalflowsarenotaone- bythemotivationsofbothforeignanddomestic waystreet,however—overthesameperiod,U.S. investors.Inparticular,wecanthinkofcapital ownershipofforeignassetshasincreasedfrom flowsastheequilibriumoutcomeofinvestors $2.3trilliontonearly$7.9trillion.1 worldwideseekingtoacquireportfoliosthatbal- Thesefiguresdocumentanegativenetinter- anceriskandreturnthroughdiversification. nationalinvestmentpositionfortheUnitedStates, Theglobalizationoffinancialmarkets— amountingtoabout$2.7trillionattheendof spurredbytechnologicaladvancesandliberaliza- 2003whenvaluingdirectinvestmentatmarket tionofcapitalflowrestrictionsworldwide—has value.Thisnegativenetinternationalinvestment createdentirelynewinvestmentopportunities positionhasbeenasourceofconsternationamong forinvestorsinboththeUnitedStatesandabroad. thosewhoseetheglobalizationoffinancialmar- Thesenewopportunitieshaveundoubtedlygiven ketsasaworrisomephenomenon.Iammuch risetoare-balancingofportfolios,andthereare moresanguineabouttheU.S.internationalasset reasonstobelievethatthisprocessmightbe position. associatedwithanetexportofclaimsonU.S. assets—acapitalaccountsurplus. U.S.financialmarketsareamongthemost THE INTERNATIONAL highlydevelopedintheworld,offeringefficiency, transparency,andliquidity.Moreover,theU.S. FINANCIAL MARKETS VIEW dollarservesasbothamediumofexchangeand Intoday’sworld,withelectronicfundstrans- aunitofaccountinmanyinternationaltransac- fers,financialderivatives,andlargelyunrestricted tions.Thesefactorsmakedollar-denominated capitalflows,investorshaveaglobalmarketplace claimsattractiveassetsinanyinternationalport- inwhichtoseekprofitablereturnsanddiversify folio.Nocapitalmarketintheworldhasacom- risk.Insuchanenvironment,weshouldconsider binationofstrengthssuperiortothatoftheUnited thepossibilitythataggregatepatternsofinter- States.Ouradvantagesincludethepromiseofa nationaltradeflowsmaysimplybetheby-product goodreturn,safety,securepoliticalinstitutions, ofaprocessthroughwhichfinancialresources liquidity,andanenormousdepthoffinancial areseekingtheirmostefficientallocationsina expertise. worldwidecapitalmarket.Thatis,insteadof Forsomepurposes,itisusefultothinkof thinkingthatcapitalflowsarefinancingthecur- U.S.financialmarketsasservingasaworldfinan- rentaccountdeficit,itmaywellbethatthetrade cialintermediary.Justasabank,oramutualfund, deficitisdrivenby—isfinancing,sotospeak— channelsthesavingsofmanyindividualstoward capitalflowsdeterminedbyinvestorsseeking productiveinvestments,theU.S.financialmar- thebestcombinationofriskandreturninthe ketsplayasimilarroleformanyinvestorsfrom internationalcapitalmarket. aroundtheworld.Intheprocess,individuals, Whilesuchaconclusionissurelyanover- companiesandgovernmentsaroundtheworld statement,becausecapitalandtradeflowsare accumulatedollar-denominatedassetstoserve 1 DataarefromtheBureauofEconomicAnalysis,asreportedintheU.S.InvestmentPositiontables.Directinvestmentismeasuredatmarket value. 2 PanelDiscussiononChallengesforU.S.Businesses asavehicleforfacilitatingtransactionsandstor- andliquidinvestmentstotheworld.Indeed,the ingliquidwealthsafely. evidentdesireofforeignerstoholdU.S.Treasury Abankearnsareturnonitscapitalbyholding securitiesisatestamenttotheconfidencethat assetsthathaveahigheryieldthantheinterest theworldhasinthesafetyandsoundnessofour rateitpaystodepositors.Similarly,theUnited financialsystem. Statesearnsahigherreturnonitsinvestments PartofthereasonU.S.capitalmarketshave abroadthanforeignersdoontheirinvestments unrivaledstrengthintheworldeconomyisthat intheUnitedStates.DespitethefactthattheU.S. U.S.financialinstitutionsprovideservicesof internationalinvestmentpositionhasbeennega- extremelyhighquality.Inthedetailedtrade tivesincethelate1980s,U.S.netincomeonits accounts,onlyavailablethrough2002atthistime, investmentsabroadhasconsistentlyexceeded weseethattheUnitedStateshasalopsidedtrade incomepaymentsonforeign-ownedassetsinthe advantageinfinancialservices.In2002,U.S. UnitedStates.Examinationofthedatashowsthat exportsoffinancialservicesamountedto$15.9 theaveragereturnonU.S.assetsabroadconsis- billion,asagainstimportsofsuchservicesofonly tentlyexceedsthecorrespondingaveragereturn $3.7billion.Anotherlineinthetableoftrade onforeignholdingsofU.S.assetsbyafullper- statisticstellsthesamestory:business,profes- centagepointormore. sional,andtechnicalservicesyieldedU.S.export HowistheUnitedStatesabletoearnasig- earningsin2002of$28.8billionasagainstimports nificantlyhigherreturnonitsassetsabroadthan ofsuchservices$10.7billion.Someofthese foreignersearnontheirassetsintheUnitedStates? services,suchaslegalandaccountingservices, Considercurrency,whichpaysazeroreturn.At arecloselyconnectedtosuccessinfinancial theendof2003,U.S.currencyheldabroadwas servicestrade. estimatedtobeabout$320billion,whereasonly atrivialamountofforeigncurrencyisheldin theUnitedStates.Incidentally,itisaremarkable CONCLUSION factthatU.S.currencycirculatingabroadisabout Righthereathome,weintheUnitedStates halfthetotalU.S.currencyoutstanding. benefittremendouslyfromaccesstotheworld’s Moregenerally,manyprivateandgovern- bestcapitalmarketandfinancialinstitutionsthat mentalinvestorsabroadrelyontheU.S.capital providesuperbfinancialservices.Othersinthe marketasthebestplacetoinvestinextremely worldalsoneedaccesstocapitalmarketsand safeandhighlyliquidsecurities.Alongaspec- financialservices.TheUnitedStateshascreated trumofsafetyandliquidity,theseassetsinclude foritselfacomparativeadvantageinthesemarkets, currency,U.S.governmentobligations,agency andweshouldnotbesurprisedthatinvestorsall debt,andcorporatebonds.U.S.equitymarkets overtheworldcometobuytheproduct. arealsohighlyliquid.TheUnitedStatesasa wholeearnsareturnfromprovidingthesesafe 3

William Poole (2004, September 9). Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/speech_20040910_poole

@misc{wtfs_speech_20040910_poole,
  author = {William Poole},
  title = {Speech},
  year = {2004},
  month = {Sep},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/speech_20040910_poole},
  note = {Retrieved via When the Fed Speaks corpus}
}