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.

Examining current account balances from a demographic perspective is potentially very useful. The intertemporal approach to current account balances is well-grounded in economic theory. Saving and investment behavior are the keys to the evolution of a country’s current account. It is exactly these behaviors that the demographic perspective highlights. Moreover, the fact that many countries, especially those in the developed world, are experiencing major demographic changes suggests that additional focus from the demographic perspective is warranted.

It is clear that Japan and Europe face imminent demographic challenges. Thus, it is natural that they accumulate claims against a country that has financial markets and economic growth prospects of sufficient magnitude to facilitate the required adjustment process. A case can be made that the current account surpluses of these countries as well as the current account deficits of the United States will be reversed in the future as these aging economies draw on their claims against the United States.

The dollar has depreciated a little bit, but in the scheme of things, the dollar has been pretty stable over the years and yet the current account deficit has risen to historic proportions...The way in which you can make these two things fit together, within a perspective that involves informed market behavior, is this demographic perspective that I tried to sketch today.

By reducing the need for domestic production of goods and services, the trade deficit subtracted about three quarters of a percentage point from real GDP growth in the first half of this year. Whether the trade gap will narrow depends—in part—on the strength of economic growth among our trading partners, because that affects demand for our exports. However, most of our major trading partners have had only moderate growth recently. So long as these conditions prevail, they won’t provide much impetus for growth in our own economy.

Non-oil import prices have risen modestly over the past year, while the prices of U.S. exports have declined relative to foreign price levels. Such price shifts do tend to curb imports and boost exports over time. But they’re hardly enough to narrow the gap very quickly.

Currently projected budget deficits are unsustainable and will ensure a low level of national saving. Conventional economic analysis suggest that this situation is likely to raise long-term interest rates, crowd-out business capital investment, depress productivity growth, and exacerbate the current account deficit.

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.

In the short run, output growth is healthy and inflation rates are stable. Investment shares are reasonable, but that is largely because the United States is borrowing such a huge amount from world capital markets. The key question is whether this borrowing is sustainable. However sustainable it is, the United States would seem well-advised to minimize risks by raising its own national saving to finance its own investment.

The real question is whether the large-scale borrowing is sustainable...Since 1990 the United States has embarked on a long-term period of high trade deficits, and now the international liability rate is close to 25 percent of GDP and rising sharply. International wealth portfolios are getting increasingly heavy in dollar-denominated assets. How long can this process continue?

In line with this record, many authors have been predicting for some time that the combination of interest rates, income, prices, and exchange rates would adjust to end the U.S. trade deficits. But the deficits have not ended, and international economists are searching for reasons to explain the situation...[One] possibility is that the so-called "home bias" in international saving-investment choices is gradually eroding.10 In this view, globalization has generally reduced the barriers to international asset diversification, and we are witnessing a rebalancing of wealth portfolios which, in the transition, can lead to persisting current account deficits or surpluses.

The accumulation of ever larger amounts of debt entails a level of risk that makes me uncomfortable. I believe it’s important to implement policies that encourage greater savings in our country so that we do not overextend ourselves and weaken our bargaining power.

[One challenge is to] maintain the flexibility of our economic and financial system.  This will be essential if we are to address our current account deficit without significant disruption.  Central to that adjustment must be an increase in net national saving.  This serves to underscore the imperative to restore fiscal discipline.

The recent somewhat quickened pace of increases in US import prices suggests that profit margins of exporters to the United States have contracted to the point where foreign shippers may exhibit only limited tolerance for additional reductions in margins should the dollar decline further.

[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.