The pronounced structural shift over the past decade to a far more vigorous and competitive world economy than that which existed in earlier post-World War II decades apparently has been adding significant stimulus to world economic activity. This stimulus, like that which resulted from similar structural changes in the past, is likely a function of the rate of increase of globalization and not its level. If so, such impetus would tend to peter out as we approach the practical limits of globalization.

Full globalization, in which production, trade, and finance are driven solely by risk-adjusted rates of return and in which risk is indifferent to distance and national borders, will likely never be achieved...But because so much of our recent experience has little precedent, as I noted earlier, we cannot fully determine how long the current globalization dynamic will take to play out.

We may not be able to usefully determine at what point foreign accumulation of net claims on the United States will slow or even reverse, but it is evident that the greater the degree of international flexibility, the less the risk of a crisis. Should globalization continue unfettered and thereby create an ever-more flexible international financial system, history suggests that current account imbalances will be defused with modest risk of disruption.

As a policymaker, these anecdotal reports [of price increases] remind me to stay alert. But it’s important to keep in mind that isolated price increases are not the same as an unwelcome rise in average prices as measured by our inflation indexes. Because of fierce competition, many businesses that compete globally are in fact reluctant to pass along higher input costs. These pressures have made price increases for domestic services more prevalent than those for consumer goods.

[A] critical long-run economic challenge facing the United States is the need to ensure that our workforce is equipped with the requisite skills to compete effectively in an environment of rapid technological progress and global competition...Demand for the least-skilled workers in the United States and other developed countries is diminishing, placing downward pressure on their wages.  These workers will need to acquire the skills required to compete effectively for the new jobs that our economy will create.

[We strengthen international exports in manufacturing] by essentially being competitive in that we develop skills that create goods and services which customers in the rest of the world want.

The issue of education is so critical...I would say what makes our country competitive is, in my judgment, two things.  One, it's our Constitution, which creates a rule of law which people want to invest in, and two, it's what's in the heads of our children, because they are the future of the people who will staff our...increasingly complex capital stock.

It is difficult to attribute the long-term interest rate declines of the last nine months to glacially increasing globalization. For the moment, the broadly unanticipated behavior of world bond markets remains a conundrum.

The process of integrating China and India into the world economy offers tremendous gains in global living standards. But the greater adjustment pressures that come with integrating the two most populous economies in the world will put a greater burden on the political sustainability of open trade policies.

The dramatic advances over the past decade in virtually all measures of globalization have resulted in an international economic environment with little relevant historical precedent. I have argued elsewhere that the U.S. current account deficit cannot widen forever but that, fortunately, the increased flexibility of the American economy will likely facilitate any adjustment without significant consequences to aggregate economic activity.

We are significantly more dependent today on the confidence of the rest of the world in U.S. economic policy and the safety and stability of our financial markets. This gives us, along with the rest of the world, a compelling interest in sustaining credibility and confidence in U.S. financial management and the strength of our financial system.

It is a world of intense competition, and that creates incentives to raise productivity as well as the means to do so. In the past decade, the U.S. economy’s average annual increase in output per hour has been 2.7 percent, just about equal to the extraordinary quarter-century boom that followed World War II. My business contacts talk and act as if the globalization now under way will bring another decade of hypercompetition. This global hothouse will enable, perhaps even force, businesses to keep productivity growth in the range we have enjoyed since the mid-1990s, hopefully for many years to come. If productivity growth can stay near 3 percent, monetary policy can accommodate relatively faster growth without igniting inflation.

By heightening competitive forces and thus incentives for productivity and innovation, international trade has likely accelerated the process of "creative destruction" by which outdated and less productive activities are replaced by new technologies and more dynamic enterprises.

Fear of terrorist acts, however, has the potential to induce disengagement from activities, both domestic and cross border. If we allow terrorism to undermine our freedom of action, we could reverse at least part of the palpable gains achieved by postwar globalization. It is incumbent upon us not to allow that to happen.