Lars Heikensten: What is happening in the United States and how will it affect us? Speech by Mr Lars Heikensten, First Deputy Governor of the Sveriges Riksbank, to the Swedish Shareholders' Association, Malmö, 9 March 2001. *  *  *  First I want to express my thanks for the invitation to speak to you here. It is always a pleasure to visit Malmö at this time of the year; the signs that spring is approaching are more numerous and clearer down here. The current focus for forecasters — around the world, I would say — is the U.S. economy. As usual when activity is turning, opinions among economists differ greatly. This reminds me of the remark someone made to the effect that if you placed all the economists in the world in a long line, they still would not reach a joint conclusion. That I think catches the mood at present among economists, though assessments do seem to be following a pattern. American economists generally appear to be considerably more optimistic than economists with an outside view of the United States. The United States has unquestionably been acting as an economic engine for global growth for almost a decade. It is equally clear that to a large extent it is the U.S. economy’s future path that will steer international economic activity and thereby the conjunctural situation in Sweden. Against this background I shall be considering a number of questions to do with the American economy and outlining some conceivable outcomes.
In my view, however, the technical innovations are not the only explanation. The deregulations that began in the 1980s, as well as the consolidation of the federal budget during the 1990s, should also be mentioned as major factors. The deregulations have helped to strengthen America’s corporate sector and the improvement in the federal finances led to increased confidence among households and firms as well as somewhat lower long bond rates. Low interest rates and higher productivity growth then paved the way for the massive wave of investment. The U.S. economy’s growth rate shot up and unemployment dropped to levels that hardly anyone believed could be combined with low, stable inflation. As outcomes proved earlier forecasts wrong, assessments of how strong demand’s long-term growth could be without generating rising inflation were adjusted gradually upwards. Turning then to share prices in the United States, in the first place the Nasdaq exchange with its predominance of high-tech companies, we can see that expectations of corporate profits rose rapidly  BIS Review 20/2001  1  to levels that had not been seen since the 1930s. The trend peaked last year with share prices at record levels and a GDP growth rate above five per cent, in some quarters even higher. The reverse side of the medal lies in the imbalances that have built up during this period. The United States has been living on borrowed money; even though the federal budget was first consolidated and then generated a growing surplus, investment exceeded aggregate saving.