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Annual ReporT 2011 Federal Reserve Bank of St. Louis | stlouisfed.org 1 Federal Reserve Bank of St. Louis Annual ReporT for the year 2011 Published May 2012 2010 2009 2005 2001 2000 1996 Many Moving Parts: A Look Inside the U.S. Labor Market Independence + Accountability Why the Fed is a well-designed central bank FEDucation How the Federal Reserve Bank of St. Louis’ economic education programs are shaping today’s minds and tomorrow’s economy Equilibrium How the U.S. economy recovers from a crisis Revolutions in Productivity Will today’s microchip-led surge take its place in history? Will Social Security Be Here for Future Generations? To keep up with the latest news and information from the St. Louis Fed, follow us on Twitter, Facebook and YouTube. See the latest numbers on GDP, trade, housing and other key economic indicators. Find out about new research from our economists and about special programs and events open to the public. President’s Message European Sovereign Debt Crisis: A Wake-up Call for the U.S. Table of Contents President’s Message .......................................................................................3 Sovereign Debt: A Modern Greek Tragedy ....................................... 4 Our Work. Our People. ........................................................................... 18 Chairman’s Message ................................................................................... 2 2 Boards of Directors, Advisory Councils, Bank Officers ............ 23 Read our financial statements on our web site at stlouisfed.org/ publications/ar There, you can also find this entire report, along with a 10-minute video featuring key points in the essay and a Spanish version of the essay. 2 Federal Reserve Bank of St. Louis | Annual Report 2011 I n recent years, many countries’ deficit-to-GDP (gross domestic product) and debt-to-GDP ratios rose as governments increased their borrowing on international credit markets to finance spending. For some European countries in particular, the ratios reached far beyond those considered sustainable. Consequently, these countries— including Greece, Ireland and Portugal—saw their borrowing costs rise dramatically as markets began questioning the countries’ ability and willingness to repay their debt. Although the U.S. continues to have low borrowing costs, the U.S. deficit-to-GDP and debt-to-GDP ratios are nearly as high as those of some of the countries that have had difficulty borrowing. The current European sovereign debt crisis serves as a wake-up call for the U.S. fiscal situation. Borrowing in international markets is a delicate matter. A country cannot accumulate unlimited amounts of debt; there is such a thing as too much debt, and it occurs at the point where the country is indifferent between the temporary benefit of defaulting and the cost of not having continued access to international credit markets. Markets understand that at some high level of debt a country has a disincentive to repay it, and, therefore, markets will not lend beyond this point. Interest rates alone are not the best way to determine whether a nation is borrowing too much or to evaluate the probability of a debt crisis. Witness Greece and Portugal—two of the latest countries to face this borrowing limit: Interest rates tend to stay low until a crisis occurs, at which time they rise rapidly. Today, the U.S. has low borrowing rates, but these low rates should not be comforting regarding the likelihood of hitting the debt limit. So, what is the limit for debt accumulation? While it can be difficult to evaluate, research has found that once a country’s gross debt-to-GDP ratio surpasses roughly 90 percent, the debt starts to be a drag on economic growth.1 In general, the European countries that continue to have poor economic performances are the ones that borrowed too much and are beyond this ratio. Over the past couple of years, they have tended to have relatively high (and frequently increasing) unemployment rates and low or negative GD
