I want to call the Committee to order.
I'd like to thank our witnesses for coming today. This is a very distinguished panel and I'm honored that you all are willing to sacrifice your morning to be here. Your presence here today evinces the weightiness of the subject, the balance of payments deficit.
In my view, this is the probably the least explored and least understood economic issue in Washington and the rest of the world. But in an increasingly globalized economy, no issue could be more important or ripe for study, particularly because even those who do understand it, like our witnesses today, aren't sure if there is any right solution.
As we all know, the US balance of payments deficit is burgeoning. Over the last two and a half years, it has risen from $320 billion in 1999 to approximately $500 billion this year.
Already a number of economists have expressed concerns about the sustainability of our dependence on foreign investment. With the national savings rate dropping to around 4% in the last few years and the personal savings rate in the red, the US was forced to fund its investment boom with foreign investment, which has generated the massive imbalance we have today.
But like the Egypt of 1875, which through its profligate spending became so indebted that it was forced to sell its ownership in the Suez Canal to the British, we are living beyond our means. And we cannot continue to do so.
What holds for individuals apparently holds true for the economy at large. Living beyond one's means is not sustainable, and the problem is not self-correcting.
Some economists thought that the problem would, in fact, self-correct: Over-borrowing would become a drag on the economy, as more of domestic GDP were allocated to foreign debt servicing. The slower economy would weaken the dollar, and as a result, the US would become less attractive to foreign investors.
But that hasn't happened. In fact, the reverse has.
The dollar has never been stronger, and now more than ever, foreign investment is flooding into the United States.
Recent gains in the euro have been marginal and arguably speculative. And as Mr. Roach notes, today foreign ownership of US Treasuries is 37%, US corporate bonds is 46% and equities is 11%.
This is a dangerous paradox.
Foreign investment should be slowing, but it's speeding up. The dollar should be getting weaker, but it's getting stronger.
I would point out that our witnesses today disagree about whether a weaker dollar is the right solution. And this disagreement in and of itself among the most studied economists in the US shows how complex this issue is.
As I see it, this hearing is the first foray into untangling this paradox. And in doing so, overcoming it.
No four people could be better called upon to meet this challenge.
There are a number of questions that I am hopeful we'll get some answers to today.
First, what is the primary driver of this growing imbalance? Is it simply the result of a mismatch in the supply of national savings and the demand for investment?
Second, is the imbalance unsustainable? I am swayed by concerns that at some point, the imbalance will become unsustainable. It almost seems as if a balance of payments-induced recession is not a question of if, but when. If it is unsustainable, will it occur gradually or is there a possibility of a coordinated, massive withdrawal of foreign capital that could straightjacket the economy?
Third, what are the risks to the economy? Should international investors decide to retrench, would the US be at significant risk for higher interest rates, more scarce investment sources and a bear market?
And finally, what policies, if any, should be considered to rectify the imbalance or mitigate the resultant risks?
I look forward to exploring these issues today. We could not have assembled a more thoughtful or impressive panel to do so.
And I'm hopeful that we can begin to come to some conclusions about what policies we should be pursuing in order to avoid this fault line running through our economy.
I want to thank our witnesses again, and I look forward to your testimony and today's discussion.
I want to recognize Chairman Sarbanes who I know has a keen interest in this issue and the other complex economic puzzles of our day. And I want to thank him for letting me hold this hearing today.