But over a long period of time, a combination of higher national savings in the United States, increased demand by our trading partners and greater exchange rate flexibility - those three factors taken together will allow the current account deficit to come down in a way that I hope would not be disruptive to our economy.

Our expectation is that if and when the housing market slows, that savings rates will tend to rise. So we have built into the forecast, so to speak, some increase in personal saving.  As home values grow more slowly, then consumers can rely less on the increase in equity as a source of wealth-building and therefore must save more out of their current income. And, again, that's to be expected.  As I've indicated, our current expectation is that process will be gradual and is consistent with continued strong growth in the economy.  However, as I also indicated, the housing market and the consumer response to any changes in the housing market is one of the risks to the forecast and one that we'll be monitoring closely as we try to assess the state of the economy in the coming year.

It is difficult to dismiss the conclusion that a significant amount of consumption is driven by capital gains on some combination of both stocks and residences, with the latter being financed predominantly by home equity extraction. If so, leaving aside the effect of equity prices on consumption, should mortgage interest rates rise or home affordability be further stretched, home turnover and mortgage refinancing cash-outs would decline as would equity extraction and, presumably, consumption expenditure growth. The personal saving rate, accordingly, would rise. Carrying the hypothesis further, imports of consumer goods would surely decline as would those imported intermediate products that support them. And one would assume that the U.S. trade and current account deficits would shrink as well, all else being equal.

I don't expect that the personal saving rate will stay down this low indefinitely...There is a very significant amount of extraction of equity from homes in this country, financed by mortgage debt...That is a major factor creating the low level of savings.  And when equity extraction slows down, as it eventually will at some point, I think you will find this personal saving rate starting back up.

These phenomena [the growing current account deficit, dwindling household savings, low level long-term interest rates and the rapid pace of house price increases] could well continue for some time longer, but they are not sustainable indefinitely. At some point, global investors will require higher expected rates of return as their portfolios become increasingly concentrated in dollar assets; house price increases will encounter resistance as they rise relative to income and rents; as housing prices level out, households will recognize that they must increase saving out of income to have adequate resources for retirement; and the Federal Reserve already has been raising short-term interest rates as demand recovers from the shocks of recent years.

Low interest rates have, in turn, been a major force driving the phenomenal run-up in residential real estate prices over the past few years, and the resultant boost to net worth must be one of the reasons households have felt comfortable directing so little of their current income to saving.

By increasing the return to saving and by damping the upward momentum in housing prices, rising interest rates should induce an increase in the personal savings rate, and thereby lessen one of the significant spending imbalances.

Personal saving is the difference between two aggregates, disposable personal income and personal outlays. These two series are collected from distinct bodies of data...Among the immediately available data, the more complete and reliable data are on the demand or product side; this is the source of GDP. Income side data are aggregated to gross domestic income, conceptually the same as GDP, but in practice differing by as much as 2.3 percent...Typically income is undercounted. All this suggests that our measure of the saving rate is both somewhat suspect because of substantial measurement error and subject to substantial revision. In fact, large variations in personal saving across time have typically been revised away.

If we were to issue an economic report card, the nation would get great grades on its current performance, but would fail on what is necessary for the future—a strong rate of national savings. Households are barely saving at all, and the federal government is spending well beyond its means...This is one of the most important macroeconomic problems confronting the U.S.—its current and persistent low level of net national savings.

Unavoidable economic logic suggests that eventually this situation will prove unsustainable: our deficit and other countries’ surplus positions will come into better balance. The question is how...National savings need to grow. One way to increase savings is to cut the federal deficit...Another source of adjustment would be an increase in the personal savings rate...Rising productivity also could help us grow out of the problem...But it is likely wishful thinking to rely on faster productivity alone even if it is sustained at current levels...A strong case can be made to begin to address this issue sooner rather than later. And personally, I would start with the federal budget deficit.

In the long run, raising the low rate of national savings in the U.S. may be one of the best things that could be done to ensure lasting prosperity both here and around the world. Finding ways to curb the federal government deficit may be the best place to start on that laudable objective.

The current account deficit as a percentage of GDP has been rising and is close to 6%. That's unsustainable. It can't rise indefinitely...High national savings will help reduce the current account deficit.

I believe that, as the baby boom generation begins to retire in a few years, it will become increasingly important for the nation to boost resources available in the future through greater national saving and enhanced incentives for participation in the labor force. The tax system has the potential to contribute importantly to those goals, and, at a minimum, tax reform should not hinder the achievement of those objectives.

Raising national saving is an essential step if we are to build a capital stock that by, say, 2030 will be sufficiently large to produce goods and services adequate to meet the needs of retirees without unduly curbing the standard of living of our working-age population.  Unfortunately, the current Social Security system has not proven a reliable vehicle for such saving.

It is much more stable for the United States to increase its own national saving and finance its own investment. This approach would support investment in the short run and make this investment more profitable in the long run, because the returns on capital would not be sent abroad.