Transcripts of the monetary policymaking body of the Federal Reserve from 2002–2008.

For the first time, Karen, you seem to be painting a short- term picture of an unsustainable pattern in the current account deficit. As I have listened to you in the past, the issues as I’ve heard them are that we always talk of the need for a much higher rate of increase in exports than imports to close the huge existing gap between them. You are now raising a somewhat more subtle issue in which it is not only the gap but the absolute size of the foreign trade magnitudes relative to GDP that have an accelerating impact. In other words, if we had a very small external sector but a very large difference between imports and exports, the percentage of the current account deficit to GDP would be small despite that sizable percentage difference in the growth of exports and imports. But now that the trade numbers are getting larger and larger in absolute terms, their impact on GDP—other things being equal with regard to the ratio of imports to exports—is becoming ever larger and a source of increasing instability. The reason is that, as the current account deficit continues to widen because the growth of exports fails to exceed that of imports, the bases of both are changing. And if under such conditions the deficit is rising relative to the GDP, we have an arithmetically unsustainable pattern even in the short run.

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