History tells us that such imbalances can persist for some time, but increase in risk as they widen. History also tells us that current account imbalances eventually require macroeconomic adjustment - adjustment that is smoother and more orderly the earlier and more coordinated the policy response. While I am not one to second-guess the markets, I also believe that we in the United States must ask ourselves whether the surge in the stock market over the past several years will continue to be accompanied by commensurate growth in output and earnings. To date, consumer spending increases spurred by the growth in the stock market have not been exceptional compared with the growth in wealth, but the growth in wealth has certainly been astonishing. Let me turn now to some of the longer-term trends driving the US economy in recent years. It is these trends that have led many to question whether the structure of the US economy has changed and to ask whether, in fact, the United States is a “new economy” today. BIS Review 29/2000  2  While the bottom line is that there is not a consensus on this issue, no one disagrees that the performance of the US economy has changed dramatically in recent years. Annual real GDP growth over the past four years is higher than it has been in decades, averaging 4% a year in comparison with average annual GDP growth rates of roughly 3% in the 1970s and 1980s.
Moreover, I am firmly convinced that growth in an economy is what ultimately underpins a healthy society. It is simply not possible to have a strong society with a permanent underclass. No society - not our own nor any other - can hope to flourish if its youth are left unemployed and a large segment of its population remains poorly educated and inadequately housed. Nor can an economy grow without a basic infrastructure that enshrines the rule of law and the accountability of the government to its people. As I survey the world economy today, I am pleased that there seems to be broad-based recognition of these fundamental precepts. World economic conditions are considerably more benign than they have been in years as we begin the new millennium. How do things look outside the United States? Let’s start with Japan. When we look at Japan’s growth in the 1990s, we really see two patterns. One is the sluggish growth since 1992, the other is the steep recession in 1998. The 1998 recession stemmed from the financial crisis in a number of other countries in Asia, leading to a collapse in corporate profits and business fixed investment, and essentially a credit crunch as financial restructuring got under way. Japan today is in the difficult phase of restructuring, with high unemployment as balance sheets are being cleaned up in the corporate and banking sectors. Moreover, business investment was slow up to the fourth quarter of 1999 and consumers have been restrained in their spending.