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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