McDonough: US must import less capital

Doug Henwood dhenwood at panix.com
Tue Oct 1 16:40:16 PDT 2002


[McDonough doesn't mention that the difference in long-term growth rate limits between the US and EU can be explained by population growth - the EU is close to flat, and the US around 1% a year.]

Reuters Market News Fed's McDonough urges less foreign capital for US Tuesday October 1, 7:04 pm ET

NEW YORK, Oct 1 (Reuters) - New York Federal Reserve President William McDonough said on Tuesday the United States would benefit from cutting its dependence on foreign capital, and it would help global growth at the same time.

"For the purpose of a really well balanced international economy, there is too much flow of capital into the United States," McDonough told the Foreign Policy Association.

Although the current level of capital inflows needed to balance the current account deficit was manageable, as shown by the U.S. exchange rate, McDonough said it is not desirable.

"It is not an ideal situation for an extended period of time if only because the growth opportunities that would be available for that capital elsewhere in the world would give us a better balanced world, economically, socially, and politically," he said during a panel discussion on The United States and the European Union.

Strong appetite from foreigners for U.S. assets has kept a steady flow of capital into the United States, helping plug the U.S. current account deficit, which grew 15.6 percent in the second quarter to a new record of $129.96 billion.

Some analysts worry that a deficit this large is unsustainable and warn that when foreigners are no longer willing to invest in the United States, the dollar will fall sharply in value -- a concern McDonough raised last March.

While he gave no such warnings this time, the Fed president did say any adjustment needs to be gradual.

"The best way to deal with this problem is for the United States to reduce its need for foreign capital," McDonough said, cautioning that such a change should not be made dramatically because that would require a serious U.S. recession.

McDonough also noted that the potential rate at which the U.S. economy could grow without triggering inflation was around 3.5 percent, compared with about 2.5 percent for the euro zone.

McDonough attributed most of these differing growth rates to higher rates of productivity growth in the United States and urged Europe to make strides to improve its productivity rate.

The New York central bank chief said the relationships between financial officials and central bankers in the United States and Europe was "superb." "It would be very difficult to imagine the cooperation being better -- we see a great deal of each other, we meet frequently, and we understand each other well."

He cited as examples cooperation between the Federal Reserve and European Central Bank after the Russian debt default in October 1998 when the financial markets became "essentially dysfunctional" as well as the response to the September 11, 2001 attacks on United States.



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