If we in the United States and other deficit countries are to move to a more healthy balance of private and public spending in relation to income, other countries cannot be as reliant on us as in the past to be their growth engine. The recent configuration of global demand, after all, has involved persistent trade surpluses in many emerging markets and this represents foregone consumption and investment that has mostly been recycled into large scale accumulation of foreign exchange reserves. To be sure, the crisis demonstrated the value of an ample reserve cushion to protect against sharp shifts in capital flows. However, a number of countries have surely reached a point at which further reserve accumulation comes with more costs than benefits. The expected return on foreign exchange reserves is likely to be quite low in relation to potential domestic uses. In fact, there is the prospect that reserves could earn a significantly negative return in local currency terms, especially when the acquisition of such reserves is undertaken to resist local currency appreciation that must eventually occur anyway. Finally, delay in adjustment of demand patterns and currencies raises the risk that these adjustments will ultimately occur in a more compressed and wrenching manner. How many times have we seen bottled-up pressures ultimately give way to disruptive overshooting? Moreover, lack of progress on rebalancing demand would put at risk the open trading regime that has been so important to global prosperity and growth. To date, protectionist pressures have been largely contained.
William C Dudley: The longer-term challenges ahead Remarks by Mr William C Dudley, President and Chief Executive Officer of the Federal Reserve Bank of New York, at the Council of Society Business Economists Annual Dinner, London, 11 March 2010. *  *  *  Thank you for giving me the opportunity to speak here today. As always, my remarks reflect my own views and are not necessarily reflective of the views of the Federal Open Market Committee (FOMC) or the Federal Reserve System. As we emerge from a deep and protracted global recession and terrifying financial crisis, we should count our blessings – the outcome could have been far worse. Extraordinary interventions helped to keep the financial system from collapsing and large doses of fiscal and monetary policy stimulus helped to put a floor under global demand, thereby preventing a full-blown depression. However, now that we are on a bit of firmer ground, it is even more important that we take stock and evaluate the challenges that still face us. How we respond will determine whether the path forward will be relatively smooth or instead will be more tortuous. I want to discuss three of these challenges today. The first challenge relates directly to the recent crisis: What needs to happen at the national and international levels to strengthen the financial system so that a crisis of this magnitude does not occur again.