"The remaining gap between private saving and domestic investment has been filled by a sizable increase in saving invested from abroad, largely a consequence of the technologically driven marked increase in rates of return on U.S. investments. Moreover, in recent years, with many foreign economies faltering, U.S. investments have looked particularly attractive. As U.S. international indebtedness mounts, however, and foreign economies revive, capital inflows from abroad that enable domestic investment to exceed domestic saving may be difficult to sustain. Any resulting decline in demand for dollar assets could well be associated with higher market interest rates, unless domestic saving rebounds."
And a column from today's FT:
Financial Times - July 26 1999
Early warning system US corporate earnings are back on track, reports Richard Waters
What could possibly go wrong now? US corporate earnings are back on track and the pace of economic growth is easing back to a level of pace now considered well within its long-term potential.
Alan Greenspan has the markets right where he wants them: the Federal Reserve may have removed the threat of higher rates in June but last week's firm words have put Wall Street back on notice that any new evidence of overheating will bring swift action.
Share prices had their worst week for a year and the yield on 30-year bonds rose back to 6 per cent. If, as Mr Greenspan suggested to Congress, a receding "wealth effect" is needed to slow domestic demand, this is all to the good.
But a reminder that soft landings can come with a bump, is offered by what the foreign exchange markets have been up to this month.
The strong dollar nurtured by Robert Rubin has been one of the pillars of the US economy in the latter stages of its expansion. It has drawn in the foreign capital needed to support the high-spending, low-saving US consumer while at the same time keeping interest rates low. It has made it possible for the US to soak up some of the world's excess production, while putting a lid on domestic price increases.
So what to make of the dollar's July reversal? As a correction to the risk of overshooting, there may be little in it. Against European currencies in particular, the Greenback had been on a one-way ride that seemed to rule out any potential of Euro-area recovery.
Corrections like this, though, can be sharper and last longer than the fundamentals seem to warrant. The unwinding of massed market positions can unleash powerful forces. Remember last year's dollar plummet against the yen?
This month's moves look like a warning of what will happen when the focus of world economic growth shifts away from American shores.
Japanese bond yields are bumping along the bottom but the rebound in the Nikkei is a potent reminder of just how little exposure to Japan most foreign investors have and how quickly demand for Japanese financial assets might recover when the world's second-biggest economy rebounds. Keeping a lid on the yen has become a challenging occupation for the Japanese authorities.
And the European authorities' apparent efforts to boost the euro against the dollar are a reminder once again that the euro-recovery is overdue. Maybe, as Germany suggests, it is finally arriving.
That prospect cut the spread between 10-year US and German government bonds from 1.5 percentage points a month ago to less than 1 point. Last week's slide in the US bond market has partly reversed this, the yield spread is back to 1.2 percentage points. But the message is clear: once European growth takes hold, the yield premium that has drawn foreign capital to the US fixed income markets could evaporate.
Meanwhile, as non-dollar assets become more attractive to investors the world over, the gargantuan American current account deficit once again looms into view.
Mr Greenspan was ready with the warning last week. In his semi-annual report to Congress, The Fed chairman pointed out that the US deficit had risen to more than 3 per cent of GDP in the first quarter of this year, from 2.5 per cent last year. Since then, it has increased. Financing that gap will not be as easy as it was late last year, when the international financial crisis drew the world's capital to the safe US shores, the Fed chairman hinted.
Foreign purchases of US Treasuries may remain very high by historic standards but they have fallen off from the levels in the final quarter of last year.
His conclusion: "As US indebtedness mounts...and foreign economies revive, capital inflows from abroad that enable domestic investment to exceed domestic saving may be difficult to sustain."
Weaning itself off foreign capital will be a challenge for the US. A weak dollar, and its impact on inflows of foreign capital, was behind the rise in US interest rates back in 1987, says Martin Barnes, an economist at Bank Credit Analyst in Montreal - which had dire consequences for an over-valued stock market.
It is too early to call an end to the dollar's glory years. But with the focus of economic growth beginning to shift, the July slide looks like a warning.