If interest rates rose faster and reached a level 100 basis points higher in 2020 than what the CBO has assumed, the net debt service burden would be about 3 ¼ percentage points higher by 2020, all else equal. Given the uncertainties around economic forecasts that far into the future, it would be highly desirable for the fiscal authorities to put in place a medium-term program of fiscal consolidation now, while market conditions are benign. At the same time, I think we must be careful and not focus exclusively on the imperative of fiscal consolidation. That is because fiscal policy adjustments have important implications for  1  2  The 2011 remittance figure is a preliminary unaudited estimate. BIS central bankers’ speeches  the level and composition of economic activity more broadly–both here and abroad. If we must undertake fiscal consolidation– and over time we must–then we need to be cognizant that this adjustment will need to be accompanied by other offsetting changes in the composition of economic activity in our and the global economy. 2 One way of illustrating these interrelationships is to use the following accounting identity, which imposes an adding up constraint on the overall economy: If you define private-sector net saving as the private balance and public sector net saving as the public balance, then: Private balance + public balance = current account balance.
As shown in (Figure 6), which shows these two components over time, the business balance is currently unusually high; that is, businesses have very high cash flows relative to their investment outlays. This suggests that some of the required adjustment could occur by fostering greater investment spending as a share of GDP. For this to occur, it will be important that economic policies promote long-term growth and financial stability, and ensure that the United States is a competitive place to base production, with a well-functioning infrastructure, a skilled workforce and a reasonable tax and regulatory system. In addition, it seems desireable that some of the adjustment should take place in the trade sector. Although a current account deficit of 3 percent of GDP by itself would be sustainable over time, for the household balance to remain close to current levels and the public balance to sharply narrow, then the current account may need to move further toward balance. For this to occur, there needs to be two offsetting adjustments. On one hand, the U.S. economy must be reoriented toward global demand and stronger net exports. On the other hand, there will have to be offsetting adjustments elsewhere in the world. After all, on a global basis, the current account balance–properly measured–must sum to zero. This means  2  See "Securing the Recovery and Building for the Future." Remarks by William Dudley at United States Military Academy at West Point, New York, November 17, 2011, for a more detailed discussion of this issue.