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https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis The Challenges for Monetary Policy B-1 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Globalization of U.S. economy • Trade flows • Financial flows • Policy coordination B-2 Leveraging of America • Rapid government debt growth • High consumer debt-to-income • High corporate debt-to-net worth • Net debtor nation https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis B-3 Major economic imbalances • International trade • Federal budget https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis B-4 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis International Trade Imbalance B-5 U.S. current account balance billions of dollars 200 100 0 -100 -200 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 1960 '62 '64 '66 '68 '70 '72 '74 *First quarter of 1988 at an annual rate. 8-6 '76 '78 '80 '82 '84 '86 '88* (j) U.S. current account balance vs. foreign capital inflows billions of dollars 200 ✓ Net foreign capital inflow 100 I I ,..,,,. -- '86 '88* ✓ / I 0 I ---------- I -100 Current account balance -200 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 1960 '62 '64 '66 '68 '70 '72 '74 •First quarter of 1988 at an annual rate. B-7 '76 '78 '80 '82 '84 (J) Net international investment position of U.S. billions of dollars 200 100 0 -100 -200 -300 -400 -500 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 1978 '79 '80 '81 '82 *Estimate. 8-8 '83 '84 '85 '86 '87* U.S. balance on goods and services billions of dollars 50 , -- __ , - -- 0 ,, ...... ', Services ' w-----, \ Total -50 Goods -100 -150 -200 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 1960 '62 '64 '66 '68 '70 '72 '74 *First quarter of 1988 at an annual rate. 8-9 '76 '78 '80 '82 '84 '86 '88* U.S. net exports: real vs. nominal billions of dollars 50 0 -50 Nominal -100 -150 -200 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 1982 1983 1984 1985 B-10 1986 1987 1988 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis (jj) Federal Budget Imbalance B-11 Federal deficit percent of GNP 8 6 4 2 0 -2 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 1960 '64 '68 '72 '76 B-12 '80 '84 '88 @) Gross public debt of U.S. Treasury trillions of dollars 3.0 2.5 2.0 1.5 1.0 0.5 0.0 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 1972 '74 '76 '78 '80 B-13 '82 '84 '86 '88 Total interest on debt percent of budget outlays 22 20 18 16 14 12 10 8 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 1976 '77 '78 '79 '80 '81 '82 fiscal year B-14 '83 '84 '85 '86 '87 Uses of total net available savings percent of GNP 12 10 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 8 Private domestic investment 6 4 2 Federal deficit 0 -2 1970 '72 '74 '76 '78 80 *First quarter of 1988 at an annual rate. B-15 '82 '84 86 '88* Sources ot total net available savings percent of GNP 12 10 8 Domestic savings 6 4 Savings from abroad 2 0 -2 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 1970 '72 '74 '76 '78 '80 •First quarter of 1988 at an annual rate. B-16 '82 '84 86 '88* Domestic savings and investment percent of GNP 10 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Domestic savings 8 l 6 Private domestic investment i 4 2 0 1982 1983 1984 1985 *First quarter of 1988 at an annual rate. B-17 1986 1987 1988* https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Personal savings percent of disposable personal income 12 10 8 6 4 2 0 1960 '64 '68 '72 '76 NOTE: Horizontal line represents the average value from 1960 to1981. B-18 '80 '84 '88 @) Consumer installment debt percent of disposable personal income 20 18 16 14 12 10 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 1960 '64 '68 '72 '76 B-19 '80 '84 '88 Net funds raised by nonfinancial corporate business billions of dollars 200 150 Debt instruments 100 50 0 ----------------- ,; ✓ Net equity issues -50 \ \ \ \ \ --------"', -100 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 1970 '72 '74 '76 '78 •First quarter of 1988 at an annual rate. 8-20 '80 '82 '84 '86 '88* Corporate debt to net worth ratio percent 100 90 80 70 60 50 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 1971 '73 '75 '77 '79 NOTE: Net worth measured on historical cost basis. B-21 '81 '83 '85 '87 Policy Implications B-22 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Federal budget deficit outlook billions of dollars 250 200 150 100 50 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 0 1980 1981 1982 1983 1984 1985 1986 fiscal year *Assuming President's fiscal 1989 budget is adopted. B-23 1987 1988 1989* Domestic spending vs. output gross domestic purchases as a percent of GNP 103 102 101 100 99 98 97 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 1966 '68 '70 '72 '74 '76 *First quarter of 1988 at an annual rate. B-24 '78 '80 '82 '84 '86 '88* Trade weighted dollar index, March 1973= 100 175 150 125 100 75 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 1973 '74 '75 '76 '77 '78 '79 '80 B-25 '81 '82 '83 '84 '85 '86 '87 '88 Gross foreign capital inflow billions of dollars 250 200 150 Private 100 50 Official 0 -50 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 1981 1982 1983 1984 8-26 1985 1986 1987 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Domestic Policy Goals Economic growth with price stabili.ty B-27 Real GNP: actual vs. trend trillions of 1982 dollars 5.0 4.5 4.0 3.5 1967-1988 trend ~ 3.0 2.5 2.0 1.5 1.0 0.5 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 1948 '52 '56 '60 '64 '68 B-28 '72 '76 '80 '84 '88 Consumer prices percent change from year ago 16 14 12 10 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 8 6 4 2 0 1960 '64 '68 '72 '76 B-29 '80 '84 '88