View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

ECONOMIC OUTLOOK, THE DOLLAR
AND THE INTERNATIONAL SITUATION

Re m a r k s
Jo h n
Federal

of

J, B a l l e s . P r e s i d e n t

Re s e r v e

Bank

Me e t i n g
In t e r n a t i o n a l

San Fr a n c i s c o

of

with

Ba n k e r s As s o c i a t i o n

S a n t a B a r b a r a , Ca l i f o r n i a
No v e m b e r

18,

1983

T h a n k you v e r y m uc h for
you,

I

Typically,

i n v i t i n g he here to s p e a k w i t h

l i m i t the s c o p e of my t a l k s to a r e v i e w

OF E C O N O M I C D E V E L O P M E N T S ON T H E D O M E S T I C
B EE N R E M I N D E D

INTEGRATED

THAT OUR E C O N O M I C

OF O T H E R C O U N T R I E S ,
OPPORTUNITY

BUT WE HA VE

IN THE P A S T YE A R T H A T THE U N I T E D S T A T E S

B E C O M E M U C H MOR E
R ES U L T ,

FRO NT,

HAS

INTO T H E W O R L D E C O N O M Y AND,

FORTUNE

AS A

IS I N T E R T W I N E D W I T H T H A T

I WOULD THEREFORE

LI K E TO T A K E T H I S

TO D I S C U S S B O T H THE B U S I N E S S O U T L O O K

FOR T H I S

C O U N T R Y AN D THE O P T I O N S F O R M O N E T A R Y P O L I C Y W I T H I N AN
INTERNATIONAL CONTEXT.
Th e

St a t e

of

Let me
AR E

Re c o v e r y

the
first

say

that

all

signs

still

indicate

IN THE M I D S T OF A S T R O N G R E C O V E R Y T H A T B E G A N

1982.

A

that

we

IN LA TE

R E V I E W OF THE R E C E N T B U S I N E S S AND F I N A N C I A L N E W S

S U G G E S T S T H A T W E ' V E A C C O M P L I S H E D A G R E A T DEA L

IN C L E A R I N G

T HE E C O N O M I C L A N D S C A P E OF ONE OF O U R M O S T S E R I O U S P R O B L E M S
—

INFLATION —

FINISHED,
PE AK

ALTHOUGH,

A C O M P A R I S O N OF T O D A Y ' S

INFLATION

S U M M E R OF
P R I C E S WA S

1980

T HE W H O L E S A L E

THE J OB

PERCENT.

1980,
LEVEL ,

IS

IN
3.8

IS V E R Y

INSTRUCTIVE,

CONTRAST,
PERCENT —

THE D E C L I N E

IS FAR F R O M

I N F L A T I O N R A T E W I T H THE

THE T W E L V E - M O N T H R A T E OF

14.8

REDUCTION FROM

1980

RA TE OF

M O N T H RAT E OF C H A N G E




OF C O U R S E ,

INCREASE

IN THE
IN C O N S U M E R

THE C U R R E N T T W E L V E
A

IN THE

60

PERCENT

INFLATION

RAT E AT

AS M E A S U R E D BY THE P R O D U C E R P R I C E

2

-

INDEX,

-

IS EVEN MO R E D R A M A T I C -- C U R R E N T L Y

10, 5 P E R C E N T
T he

IN 1980.
news about

good

inflation

ON O T H E R A S P E C T S OF THE E C O N O M Y ,
ECONOMIC
1982,

1,4 P E R C E N T V E R S U S

is

bolstered by r e p o r t s

THE

IN DE X OF L E A D I N G

I N D I C A T O R S HA S B EE N M O V I N G U P W A R D S I N C E

S ince

Ja n u a r y * it h a s

OF 9 ,0 P E R C E N T .

scored

a

very

impressive

gain

R E A L G N P G R O W T H AT 9 . 7 P E R C E N T IN T H E

S E C O N D Q U A R T E R OF T H I S Y E A R WAS THE S T R O N G E S T
O V E R T W O YEAR S.

IT HAS BEE N

IN

AND E S T I M A T E S FOR THE THIRD Q UARTER

GNP

INDICATE THAT

SEPTEMBER

C O N T I N U E D TO E X P A N D AT A H E A L T H Y

7.9

PERCENT R A T E .

E Q U A L L Y G R A T I F Y I N G HA S B E E N T H E P R O G R E S S ON

THE JOB FRO NT ,

AS THE U N E M P L O Y M E N T

DOUBLE-DIGIT

T E R R I T O R Y TO 8 . 8 P E R C E N T IN O C T O B E R AND

CIVILIAN EMPLOYMENT
May and

RATE T U M B L E D OUT OF

I N C R E A S E D BY A L M O S T

2k

MILLION BETWEEN

Oc t o b e r .
NATI ON

At

o u r Bank,

TO G R O W C L O S E TO
E X P A N D AT A B O U T

we e x p e c t r e a l

6,0
5.0

PERCENT

GNP

DURING

P E R C E N T IN

fo r t h e

1983

1984,

R E F L E C T S THE S U B S T A N T I A L

IMPROVEMENT

as a w h o l e

A ND TO C O N T I N U E

ThIS

LED AND S U S T A I N E D BY C O N S U M E R S P E N D I N G ,

U.S.

IS AN E X P A N S I O N

WHOSE STRENGTH

IN R E A L C O N S U M E R

I N C O M E S AN D W E A L T H R E S U L T I N G FR O M THE D R A M A T I C S L O W D O W N
INFLATION,

FROM LAST

JULY'S

TAX CUTS,

TO

IN

AND F R O M T HE S P A R K L I N G

S T O C K M A R K E T R A L L Y E A R L I E R T H I S Y E A R T H A T B O O S T E D THE V A L U E
OF H O U S E H O L D S '

PORTFOLIOS,

IN C O M P A R I S O N ,

E Q U I P M E N T S P E N D I N G HAS G R O W N O N L Y M O D E S T L Y




P L A N T AND
IN

1983

BECAUSE

OF THE C U R R E N T
NET EXPORTS —

THE D I F F E R E N C E B E T W E E N E X P O R T S AND

And

H IG H L E V E L S OF E X C E S S P L A N T C A P A C I T Y .

HAVE A C T U A L L Y D E C L I N E D B E C A U S E OF THE

IMPORTS —

EXCHANGE VALUE

STRONG

OF TH E D O L L A R .
EE£ERAL_HE E K I T S

AMD Bl G H R E A L

The p r o x i m a t e
TO A L E S S E R E X T E N T

INTEREST RATES

c a u s e of the w e a k n e s s
IN D O M E S T I C

R E L A T I V E L Y H I G H L E V E L OF RE AL

in

INVESTMENT SPENDING)
INTEREST RATES —

I N T E R E S T R A T E S A D J U S T E D FOR T H E R AT E OF
MANY OBSERVERS
PROBLEM —
RATES ~

HAVE P O I N T E D OUT,

IN O T H E R WORDS,

(and

IS THE

THAT

INFLATION,

THE R E A L

IS,

Bui ]

AS

S O U R C E OF THE

THE C A U S E OF T H E S E H I G H R E A L

IS THE F E D E R A L G O V E R N M E N T

Th e f i s c a l

net e x p o r t s

DEFICIT,

138 3 d e f i c i t of $ 1 9 5 , 3 b i l l i o n a m o u n t e d to

A P P R O X I M A T E L Y 8 5 P E R C E N T OF A V A I L A B L E NE T S A V I N G S FR O M THE
P R I V A T E S E C T O R AND T H E S U R P L U S E S OF S T A T E AN D L O C A L
GOVERNMENTS,

A ND

IS F O R E C A S T TO BE

THE N E X T T H R E E Y E A R S AT L E AST,

IN T H A T N E I G H B O R H O O D

T h IS O B V I O U S L Y

R O O M FOR THE F I N A N C I N G OF P R I V A T E

FOR

LEAVES LITTLE

INVESTMENT SPENDING,

I N C L U D I N G H O U S I N G AN D O U R N E T E X P O R T S ,

WlTH A DEMAND

C R E D I T T H A T E X C E E D S THE A V A I L A B L E S U P P L Y ,

INTEREST

FOR

RATES

HAV E B E E N BI D UP A S TH E M A R K E T ' S W A Y OF A L L O C A T I N G C R E D I T ,
AN D P R I V A T E D E M A N D S

AS

I MENTIONED,

HAVE BE E N C R O W D E D OUT,

PA R T OF THE C R O W D I N G O U T H A S T A K E N THE

FOR M OF A D E T E R I O R A T I N G F O R E I G N A C C O U N T .
HA V E W I T N E S S E D A D R A M A T I C U P S U R G E




SlNCE

1980,

WE

IN T H E S T R E N G T H OF THE

n -

-

U.S.

DOLL AR IN C O M P A R I S O N WITH F O REIGN CU RR EN CIE S.

THE

D O L L A R ' S AV E R A G E VALUE A G A I N S T MAJOR C U R R E N C I E S A P P R E C I A T E D

27

1980

PERCENT B E T W E E N

VALUE OF THE DOLLAR,

—

M ARKING A
T he

28

AND ABROAD,

strength

is

due

HAS BEEN E Q UALLY STRO NG

largely

R E Q U I R E M E N T S OF THE FE D E R A L GO VE RNME NT,
HIGH REAL RATES AND,

THE REAL

1980.

PE R C E N T GAIN SINCE

d o l l a r 's

1983.

I.E., THE E X C H A N G E RATE A D J U S T E D FOR

U.S.

PRICE TRE NDS IN THE

AND M I D - O C T O B E R

to

the

financing

WHICH HAVE BR OUGHT

IN THEIR WAKE, A HIGH DEMA ND FOR

DO L L A R S TO INVEST IN THE

U.S.

THESE FO R E I G N INVEST MEN T

FUNDS HAVE BEEN W E L C O M E D BY MANY AS A D E S I R A B L E S U P P L E M E N T
TO

U.S.

SAVINGS,

AND TO KEEP A LID ON F URTHER
Ho w e v e r ,
ADVERS E

this

ignores

IMPACT OF A STRON G

The STRONG

U.S.

U.S.

H E LPIN G TO F I NANCE

U.S.

the

U.S.

BUDGE T DEFIC I T S

INTEREST RATE INCREASES.

other

side

of

the

—

coin

the

DOLL AR ON THE EXPO RT SECTOR.

DOLLAR HAS A P P R E C I A B L Y R E D U C E D THE

C O M P E T I T I V E N E S S OF

U.S.

EX P O R T S IN WORLD MA R K E T S AND MADE IT

EAS IER FOR FO R E I G N P R O D U C E R S TO SELL IN THE UNI TED STATES.
The U N F A V O R A B L E E M P L O Y M E N T AND OU T P U T E FFECTS R E S U L T I N G
FROM DOLLAR A P P R E C I A T I O N HAVE LED TO A RI S I N G TIDE OF
P R O T E C T I O N I S T S E N T I M E N T IN THE

U.S.

THAT T H R E A T E N S TO CA USE

M U L T I - L A T E R A L TRADE R E S T R I C T I O N S AND A R E D U C T I O N IN WOR LD
trade
in

.

Se v e r a l

foreign

protest, pointing

to

governments
higher

import

PAID FOR GO O D S PR I C E D IN D O L L A R S —




have

added

bills

their

that

voices

must

MOST NOTABLY, OIL.

be

5

-

The h i g h
SO M E

U.S.

dollar

Ja p a n ) to c o n t r o l
Authorities

in

their

these

also

affected

the

(PRIMARILY,

FOREIGN COUNTRIES

has

GERMANY,

FRANCE,

domestic

countries

M O N E T A R Y E A S E AN D L O W E R
DOMESTIC RECESSIONS.

-

monetary

might

want

ability

policy
to

of

AND

.

consider

I N T E R E S T R A T E S AS ONE WAY TO C O U N T E R

B U T T H E Y A L S O W A N T TO P R E S E R V E TH E

E X T E R N A L V A L U E OF T H E I R C U R R E N C Y .

B E C A U S E M O N E T A R Y EASE

P U T S D O W N W A R D P R E S S U R E ON C U R R E N C Y V A L U E S ,

THESE CENTRAL

B A N K S FAC E A D I F F I C U L T T R A D E - O F F .

I

F i n a l l y th e U n i t e d S t a t e s ,
HOW,

IN E F F E C T ,

P A R T OF

IT IS U S I N G

ITS G O V E R N M E N T

THE R E S T OF THE W O R LD ,

believe,

n e e d s to a d d r e s s

ITS F O R E I G N A C C O U N T TO F I N A N C E

DEFICITS.

THE CAPITAL

C A U S E D BY H I G H

INFLOW FROM

INTEREST

R A T E S HERE,

M E A N S T H A T TH E S A V I N G S F R O M O T H E R C O U N T R I E S ARE
TO F I N A N C E

THE F E D E R A L D E F I C I T .

HA S NOTE D,

THI S O U T C O M E

As

BEING TAPPED

CHAIRMAN PAUL VOLCKER

IS E S P E C I A L L Y T R O U B L E S O M E AT A T I M E

WHEN LESSER D E V E L O P E D C O U N T R I E S FACE A SERI O U S CA P I T A L
SHORTAGE.

lM .J = D £ _ i)£ B i_ P r o b l e m
Re c e n t

nobel

prize

winner

La w r e n c e

Klein

noted

the

O T H E R DA Y T H A T M O S T OF THE B U R D E N FOR S T A B I L I Z I N G THE
E C O N O M Y H A S F A L L E N ON M O N E T A R Y P O L I C Y B E C A U S E OF F A I L U R E TO
GET THE F I S C A L D E F I C I T D O W N .

THE FED,

IN O T H E R W O RD S,

HAS

B E E N G I V E N T H E U N E N V I A B L E T A S K OF B O T H C O N T I N U I N G THE F I G H T
AGAINST

INFLATION,

TR AC K .

A t THE S A M E TIME,




AND K E E P I N G THE C U R R E N T R E C O V E R Y ON
TH IS T W O - F O L D T A S K H A S B E E N M A D E

-

6

-

EVEN M O R E D I F F I C U L T BY THE O N - G O I N G P R O B L E M T H A T L E S S E R
DEVELOPED COUNTRIES

(LDCs)

ARE H A V I N G S E R V I C I N G AND R E P A Y I N G

T H E I R DEBT,
L et m e

present some background

before

discussing

I M P L I C A T I O N S OF T H I S P R O B L E M FOR M O N E T A R Y P O L I C Y .
to

Federal

NATIONS,

WIDE,

data

,

LDC

OWE A P P R O X I M A T E L Y

Of

WORL D,

Re s e r v e

WITH

THIS,

$100

ABOUT

$285

countries

$575

U.S.

OPEC

, excluding

IS O W E D TO B A N K S W O R L D ­

U.S.

THEIR TOTAL FOREIGN LOAN EXPOSURE
Bo t h the

ACCORDING

B I L L I O N TO THE RE S T OF THE

BILLION

B I L L I O N O W E D TO

the

BANKS.

FO R

SOM E BANKS,

EXCEEDS THEIR CAPITAL.

and o t h e r l e a d i n g c r e d i t o r c o u n t r i e s

STRONG SAFETY NETS UNDER THEIR BANKING SYSTEMS,

have

A N D C A N BE

E X P E C T E D TO P U R S U E A P P R O P R I A T E M O N E T A R Y A N D F I S C A L P O L I C I E S
IN T H E C A S E OF A S E R I O U S D E F A U L T .

NEVERTHELESS,

SUC H A

D E F A U L T W O U L D P O S E U N A V O I D A B L E R I S K S TO F I N A N C I A L AN D
ECONOMIC

STABILITY,

IN SHORT,

BO T H HE RE A N D A B R O A D .

NO ONE CAN D E N Y THE

P R O B L E M WE H A V E H E R E .

HOWEVER,

S E R I O U S N E S S OF THE

WE N O W H A V E A M U C H B E T T E R

U N D E R S T A N D I N G OF THE N A T U R E OF THE P R O B L E M W H I C H
A L L O W US TO D E A L W I T H
WORKABLE
AN

IT E F F E C T I V E L Y .

IN MY VI EW ,

A

S O L U T I O N R E Q U I R E S TWO KEY E L E M E N T S .
INDISPENSABLE

F I R S T S T E P MUS T BE D E T E R M I N E D A C T I O N

BY M A J O R B O R R O W I N G C O U N T R I E S TO R E D U C E
CUTTING

SHOULD

E X T E R N A L D E F I C I T S BY

I N F L A T I O N AND B U D G E T D E F I C I T S A N D E S T A B L I S H I N G

REALISTIC

EXCHANGE

R A T E S AN D D O M E S T I C

INTEREST RATES.

I N T E R N A T I O N A L M O N E T A R Y F U N D W I L L P L A Y AN I M P O R T A N T R O L E




THE
IN

7

.

TH I S STEP,
PROGRAMS,

A

-

BOTH HELPING DEBTOR C O U N T R I E S

TO F A S H I O N T H E S E

AN D M O N I T O R I N G T H E I R S U C C E S S ,

S E C O N D KEY E L E M E N T

IS THE W O R K I N G

OUT OF A R R A N G E M E N T S

A M O N G BANK C R E D I T O R S TO P R O V I D E C O N T I N U I N G C R E D I T SO T H A T
THE D E B T O R ' S
WORK,

ADJUSTMENT PROGRAMS

The FACT

REPAY

HAVE THE O P P O R T U N I T Y TO

IS T H A t F E W C O U N T R I E S ARE

INDEBTEDNESS

RAPIDLY,

DEBT PROBLEM THEREFORE

An

ORDERLY

IN A P O S I T I O N TO

IS L I K E L Y TO R E Q U I R E

C U R R E N T AND F U T U R E M A T U R I T I E S ,

LDC

S O L U T I O N TO THE

" R O L L - O V E R S " OF

AN D E X T E N S I O N S OF B A N K

CREDIT.
T h e S I T U A T I O N WE F AC E HER E

IS A C L A S S I C E X A M P L E OF W H A T

E C O N O M I S T S W O U L D C A L L AN " E X T E R N A L I T I E S P R O B L E M " ,
S p e c i f i c a l l y , an
NARROW
NOT,

individual

bank

may

perceive

I N T E R E S T TO W I T H D R A W F R O M L E N D I N G ,

IF O T H E R B A N K S ARE OF THE S A M E MI ND ,

VOLCKER NOTED

IN C O N G R E S S I O N A L

it

BUT

As

is

in

IN F A C T

its

IT IS

CHAIRMAN

T E S T I M O N Y E A R L I E R T H I S YEAR,

" R E F U S A L OF B A N K S TO P A R T I C I P A T E

IN S U C H

PROGRAMS COULD UNDERMINE THEIR COMMON

rR E S T R U C T U R I N G )

INTEREST

IN

M A I N T A I N I N G THE S E R V I C I N G A N D U L T I M A T E L Y C O L L E C T A B I L I T Y OF
EXISTING CREDITS."

T he Ro l e . q f

the

The Fe d e r a l
St a b i l i z a t i o n

.Fe d e r a l . I

eserve.

Re s e r v e , as

well

as

Fu n d , has p a r t i c i p a t e d

"b r i d g i n g " c r e d i t s

in

instances

U.S.

the
in

where

Exchange

providing

immediate

short

-t e r m

liquidity

R E Q U I R E M E N T S OF A D E B T O R C O U N T R Y C L E A R L Y T H R E A T E N E D
INTERNATIONAL FINANCIAL STABILITY.




THESE

I N V O L V E M E N T S HAVE

8

-

BE E N

L I M I T E D AN D BRIEF,

-

HOWEVER,

BECAUSE A CENT RA L BANK

N E I T H E R T H E C A P A C I T Y NOR M A N D A T E TO S U B S T I T U T E
FOR P R I V A T E L E N D I N G

HAS

ITS C R E D I T

IN S U C H S I T U A T I O N S .

IN T H E R E G U L A T O R Y AND S U P E R V I S O R Y A R E A , THE F E D E R A L
Re s e r v e

has

worked

S T R E N G T H E N THE
TO P E R F O R M
PROBLEM,

with

U.S,

other

federal

banking

B A N K I N G S Y S T E M SO T H A T

ITS V I T A L RO LE

agencies

to

IT CAN C O N T I N U E

IN H E L P I N G S O L V E THE L D C D E B T

WHILE PR O T E C T I N G F IN AN CI AL AND M ONE TA RY ST ABILITY

AT HOME .

AS YOU KNOW,

THE F E D E R A L R E S E R V E AND THE

C O M P T R O L L E R OF THE C U R R E N C Y H A V E E S T A B L I S H E D A M I N I M U M
CAPITAL GUIDELINE

U.S.

FOR P R I M A R Y C A P I T A L OF 5 P E R C E N T

B A N K S T H A T C O N D U C T M O S T OF THE

As

BANKING BUSINESS,
IMPRESSIVE

A G R OUP ,

IMPROVEMENTS

PA S T T WO Y E A R S ,

U.S.

FOR L A R G E

INTERNATIONAL

THESE BANKS

HA VE M A D E

IN T H E I R C A P I T A L P O S I T I O N S

IN TH E

AN D A L M O S T A L L OF THE B A N K S W I T H I N T H I S

G R O U P NOW E X C E E D T H E M I N I M U M G U I D E L I N E S .
Th e F e d e r a l

Reserve

has

sought

A C H I E V E M E N T OF T H E S E G U I D E L I N E S ,
INCLUDING THEM

IN THE C R I T E R I A

to

promote

the

A M O N G O T H E R WAYS,

BY

IT C O N S I D E R S FOR R E G U L A T O R Y

A P P R O V A L OF M A J O R A C Q U I S I T I O N S .

A RECENT CASE

IN P O I N T W A S

THE A P P L I C A T I O N OF B A N K A M E R I C A C O R P O R A T I O N TO A C Q U I R E
Seafirst

Co r p o r a t i o n .

Bo a r d

Go v e r n o r s

of

In a p p r o v i n g

noted

that

the

expansions

application
of

large

, the

multi

­

national

B A N K I N G O R G A N I Z A T I O N S S H O U L D BE C O N S I S T E N T W I T H AN

ADEQUATE

CAPITAL POSITION.

ACQUISITION,




THUS,

IN THE S E A F I R S T

THE B O A R D S E C U R E D A W R I T T E N C O M M I T M E N T F R O M

-

B a n k A m e r ic a C o r p o r a t i o n

9

-

indicating

its

intention

to

secure

a

5 PERCENT PRIMARY CAPITAL RATIO WITHIN TWELVE MONTHS,
IN THE L A S T FEW M O N T H S ,

S E V E R A L O B S E R V E R S HAVE A S K E D

W H E T H E R T H E S A M E S O R T OF C O N D I T I O N S O U G H T TO BE A P P L I E D TO
SEVERAL PROPOSED MAJOR
ORGANIZATIONS,

U.S.

A C Q U I S I T I O N S BY F O R E I G N B A N K I N G

T H E S E O B S E R V E R S NOTE T H A T UP TO NO W U.S.

REGULATORY POLICY

HAS A L L O W E D S UC H A C Q U I S I T I O N S TO TAK E

P L A C E SO L O N G AS THE F O R E I G N B A N K ' S C A P I T A L L E V E L W A S IN
LINE W I T H

ITS C O U N T R Y PEE RS,

MAINTAIN ADEQUATE
SUBSIDIARY,

AND AS L O N G AS

L E V E L S OF C A P I T A L

IN ITS

IT A G R E E D TO

U.S.

BANK

THE R E S U L T WAS A S E R I E S OF A C Q U I S I T I O N S OF

U.S.

B A N K S BY F O R E I G N B A N K S W I T H C A P I T A L L E V E L S O F T E N W E L L B E L O W
T H O S E R E Q U I R E D OF

U.S.

BANKS,

EV E N A F T E R M A K I N G G E N E R O U S

A L L O W A N C E S FOR D I F F E R E N T A C C O U N T I N G PRACTICES.
IN THE E N V I R O N M E N T W H E R E

U.S.

B A N K S ARE B E I N G P R E S S E D

TO M E E T M I N I M U M C A P I T A L R E Q U I R E M E N T S ,
LEGITIMATE,

BOT H ON G R O U N D S OF P R U D E N C E

EXAMINE WHETHER THIS POLICY
OPINION,

THIS QUESTION

RECUR WITH

IT S E E M S TO ME T O BE
AN D E Q U I T Y ,

S H O U L D BE R E V I S E D .

TO

In MY

IS N OT G O I N G TO GO A W A Y AND W I L L

I N C R E A S I N G F R E Q U E N C Y AND

INSISTENCY

IN T H E

FUTURE,
Mo n e t a r y

Policy

and

the

Th i r d W q . l d .
r

F i n a l l y let me say a l i t t l e a b o u t
AND T H E

LDC

DEBT PROBLEM.

P R O B L E M S C A U S E D BY HI G H
POINT




U.S.

monetary policy

I R E F E R R E D E A R L I E R TO S O M E OF TH E

INTEREST RATES

IN THE

U.S.

I DID N O T M E N T I O N W A S T H A T I N T E R E S T R A T E S ON A

ONE

10

-

LDC

S I G N I F I C A N T P A R T OF

The

ra te s .

Organization

Development

countries.
Brazil,

BILLION

IN

1982

Of t hi s a m o u n t ,

FOR

U.S.

interest

LIQUIDITY PROBLEMS

E S T I M A T E D TH A T AN

F e d e r a l Fu n d s

rates

$3.4

The Fed

$140

the

exacerbate

F A C E D BY T H E S E C O U N T R I E S AT A

would

E C O N O M I S T S ON MY S T A F F H A V E

100

NON-0PEC

boost

the

TO

200

net

BASIS POINTS

debt

IN THE

service

D E V E L O P I N G C O U N T R I E S A M I N I M U M OF

B I L L I O N ON AN A N N U A L BA SI S.
has

come

under

M O N E Y TO G R O W M O R E R A P I D L Y ,

pressure

W H ICH ,

C O U N T R I E S BY P U S H I N G D O W N

U.S.

Argentina,

a c c o u n t e d f or

therefore

I N C R E A S E OF

rate

R E Q U I R E M E N T S OF

LDC

DEVELOPING

fou r c o u n t r i e s ~

P A R T I C U L A R L Y V U L N E R A B L E TIME,

TO

NON-0PEC

loans

OR 8 4 P E R C E N T OF THE TO TAL.

H igh

$1.7

INTEREST

for E c o n o m i c C o o p e r a t i o n a nd

S o u t h K o r e a an d M e x i c o ~

BILLION,

U.S.

L O A N S ARE T I E D TO

e s t i m a t e s th a t t h e s e f l o a t i n g - i n t e r e s t

$155

AVERAGED

-

Such a policy,

periodically

IT IS A R G U E D ,

IT

MIGHT

allow

WOULD HELP

I N T E R E S T R A T E S HER E

in my e stim ation,

T E M P O R A R Y G A I N S AT BEST.

to

IN THE

wo ul d p r o d u c e on ly

INITIALLY LOWER

INTEREST

R A T E S AND E A S E T H E D E B T S E R V I C E C O S T S OF L E S S E R D E V E L O P E D
COUNTRIES,

BU T T H I S T E M P O R A R Y R E S P I T E U L T I M A T E L Y W O U L D BE

U N D O N E BY E V E N H I G H E R
AS

I N T E R E S T C O S T S F O R AN E X T E N D E D P E R I O D ,

I N F L A T I O N P I C K S UP A G A I N AND

INCORPORATE

I N T E R E S T R A T E S R I S E TO

A HIGHER "INFLATION PREMIUM".

IN SHO RT ,

T H E R E ARE NO G R O U N D S FOR B E L I E V I N G T H A T AN

I N F L A T I O N A R Y P O L I C Y HERE W O U L D H E L P TH E




LDCS

A N Y MORE T H A N

- ii IT W O U L D HE L P US.

FAR F R O M

BE H A R M F U L FO R E V E R Y O N E .
RECOGNIZE

TH A T A L A S T I N G

IT —

THE U L T I M A T E

At TH E S A M E TIME,
S O L U T I O N TO THE

WE N E E D TO

LDC

DEBT PROBLEM

D E P E N D S ON S U S T A I N I N G THE E C O N O M I C R E C O V E R Y ,
IN O T H E R

INDUSTRALIZED NATIONS,

RESULT WOULD

B O T H HER E AND

LDC

OTHERWISE,

DEBTOR

N A T I O N S W O U L D FA C E AN E R O S I O N OF T H E I R C A P A C I T Y TO S E R V I C E
D E B T AS F A L L I N G E X P O R T S A L E S CUT
EARNINGS,
ECONOMY

This

IS AN

INTO T H E I R F O R E I G N E X C H A N G E

P O I N T IS W O R T H E M P H A S I Z I N G B E C A U S E T H E

U.S.

I M P O R T A N T M A R K E T FOR M A N Y OF THE M A J O R L E S S E R

DEVELOPED DEBTOR COUNTRIES.

It A C C O U N T E D ,

55.1 P E R C E N T OF M E X I C O ' S M E R C H A N D I S E
P E R C E N T OF B R A Z I L ' S
TO MY MIND,

FOR E X A M P L E ,

FOR

EXPORTS AND 20.5

IN 1982.

THE B E S T M O N E T A R Y P O L I C Y T H A T WE CAN P U R S U E

IS THE ONE WE H A V E

IN F A C T B E E N F O L L O W I N G .

IT C O N S I S T S OF

T I M E L Y A N D M O D E R A T E A D J U S T M E N T S TO THE G R O W T H
A G G R E G A T E S TO K E E P TH E M ON T R A C K ,

IN T H E M O N E Y

AFTER ALLOWING

IN T H E RATE OF T U R N O V E R OF M O N E Y .

FOR C H A N G E S

T H IS P O L I C Y H A S P R O B A B L Y

THE B E S T C H A N C E OF M A I N T A I N I N G A S U S T A I N E D N O N - I N F L A T I O N A R Y

U.S.

ECONOMIC EXPANSION

IN THE

A N D , IN TU RN,

LA Y THE G R O U N D W O R K

FOR A L O N G - T E R M

OF H E L P I N G TO

S O L U T I O N TO THE P R O B L E M S

OF I N T E R N A T I O N A L L E N D I N G .

T O S U M UP,

WE CAN BE T H A N K F U L FOR H A V I N G B R O K E N BO TH

THE U P W A R D S P I R A L OF

I N F L A T I O N AND THE D O W N W A R D S P I R A L OF

R E C E S S I O N D U R I N G THE P A S T YEAR.
THE W O R S T R E C E S S I O N S



IN R E C E N T

T H E R E C O V E R Y F R O M ON E OF
HISTORY SHOWS

E V E R Y S I G N OF

12

-

CONTINUING,

THOUGH HIGH GOVERNMENT

D E F I C I T S C O N T I N U E TO

R A I S E C O N C E R N S A B O U T THE L O N G E R - T E R M P R O S P E C T S F O R E C O N O M I C
GROWTH.
ON T H E

I N T E R N A T I O N A L FRONT,

DEBT PROBLEM HAS BEEN MIXED.
Brazil and

Ar g e n t i n a

make

PROGRESS

POLITICAL UNCERTAINTIES

it

difficult

LDC

IN S O L V I N G THE

to

assess

at

IN

this

TIME THE P R O S P E C T S FOR R E S O L U T I O N OF T H E I R P R O B L E M S .
Me x i c o , p e r h a p s , provides
of

sucess

serious

AL L OF
TIME,

.

A

drastic

capital

best

devaluation

flight

ITS E F F O R T S

the

from

example
of

Mexico

TO R E S O L V E

the

that

of

peso

some

measure

S T O P P E D THE

threatened

to

At

ITS D I F F I C U L T I E S .

undo

THE SA ME

THE D E V A L U A T I O N T U R N E D T H E C U R R E N T A C C O U N T A R O U N D

A SUBSTANTIAL

D E F I C I T TO A H E A L T H Y S U R P L U S .

DESPITE CONTINUING HIGH
economy

, Mexico

has

As

FROM

A RESULT,

I N F L A T I O N AND A S E V E R E L Y D E P R E S S E D

been

able

to

S U F F I C I E N T F O R E I G N F U N D S TO R E P A Y

continue

to

attract

ITS D E B T S AS T H E Y C O M E

DUE.
Against
Fe d e r a l

, non-inflationary

establishing




LDC

background

R e s e r v e 's o n - g o i n g

sustained

the

the

debt

a

climate

problem

.

of

these

strategy
recovery

favorable

to

developments
of

promoting

offers
the

the

ultimate

the
a

BEST h o p e

of

solution

of