Improving our fiscal position is the most effective means we have available to reduce our vulnerability during this prolonged period of adjustment. We need to produce a substantial reduction in our structural deficit over the medium term and begin to reduce the more dramatic longer term gap  2/3  between our resources and commitments. And we need to restore a reasonable cushion in our structural budget balance to help us deal with future shocks. If we are unable to begin to generate more confidence in the capacity of the U.S. political system to produce these improvements, we would face a greater risk of future increases in risk premia. And even though substantial fiscal consolidation would not by itself bring the external imbalance down to a more sustainable level, it would improve the prospect for a smoother adjustment to that outcome. The general risk inherent in these imbalances—the risk of more adverse growth outcomes and asset price volatility—reinforces the importance of sustaining the strength and resilience of the U.S. financial system. Our financial system today is in substantially stronger shape than it was even in the recent past, and the major institutions now appear to be managed so that they are less vulnerable to the type and magnitude of shocks they’ve experienced in the past couple decades. Our challenge, however, it to make sure they are as well positioned to deal with the full range of potential future risks.
The apparent strength in U.S. productivity growth, our greater overall flexibility as an economy and the resilience of our financial system puts us in a stronger position to deal with the challenges in the transition ahead. But we face a number of difficult long-term challenges as a nation—in our fiscal position, in how well we equip our citizens to prosper in a more competitive world and in our ability to sustain political support for the policies, including our relatively open trade policy, that have been an important source of the improvement in U.S. prosperity. Our external imbalances make it more important that we invest in meeting those challenges. Thank you. 3/3