First, the deleveraging of the household sector is rather well advanced and continuing. Households are repairing their balance sheets by reducing debt and rebuilding savings. The savings rate has hovered around 6 percent for many months now, more than triple the level that prevailed at the end of the Great Moderation. Consumer spending has been growing more slowly relative to income than it did before the recession. I expect that this more measured consumption behavior is likely to persist.
A less consumption-dependent economy will help rebalance the country's external accounts—the trade and current accounts. It's unlikely and even undesirable that there be a drastic shift away from consumption, so less American consumption will not fix the global imbalances. But a stronger savings and investment economy here and its mirror image—a less consumption-driven economy—should temper the dangerous tensions that are characteristic of international imbalances.
Stronger savings by U.S. consumers won't be enough to correct our external imbalance without significant reduction of the country's public borrowing.
Tuesday, April 5, 2011
The "Great Rebalancing"
From Fed President Lockhart: