John B. Taylor
Under Secretary of Treasury for International Affairs
Remarks at a Breakfast Hosted By
Tepper School of Business
Carnegie Mellon University
Duquesne Club
Pittsburgh, Pennsylvania
September 21, 2004
Thank you for inviting me to speak here today. It is good to be back in Pittsburgh where I grew up and have many fond memories and friendships.
Today is the last day of summer. Near the end of this summer and every summer for the last 25 years, the Kansas City Federal Reserve Bank has held an international conference in Jackson Hole, Wyoming, overlooking the majestic Teton Mountains. Central bankers--including the Chairman of the Federal Reserve Board--finance ministry officials, and journalists travel to the conference from around the world to talk and compare notes about current global financial matters. I went to the first Jackson Hole monetary conference in the summer of 1982, and I have attended many since then, including this summer's conference. And after the conference, I traveled to South America, Africa, and Europe where I discussed further the global economic situation with finance ministers and central bank governors in their own countries.
The talk at this year's Jackson Hole conference and at other meetings I attended in the last month was much different from years past. The talk virtually everywhere is about how remarkably good the global economy is right now. And this good global economy is good news for the United States economy because it means that the growth in exports, in jobs, and in incomes for Americans will be more certain and lasting.
Unlike many conferences in the past, this year there were no major financial crises in the world to talk about. This was in marked contrast to the 1990s when one financial crisis after another brought high interest rates and soaring unemployment to the economies of Latin America, Asia, and Russia.
Contagion of financial crises across countries, which was discussed so much during the conferences in the 1990s, also seems to have disappeared from the scene. It was in 1998 that the default on Russia's debt caused financial storms as far away as Africa, Latin America, and East Asia. In the more recent Argentina default there was no contagion beyond Uruguay, which is just next door.
And there was no major economy in recession this year. The only recession that I heard mentioned at the conference was the recession in the "crisis expert" business. One crisis expert even complained to me about the lack of business, and jokingly asked if I could do something about it.
There was no talk of bubbles either. Most economies in the world are now growing at a healthy "goldi-locks" pace--neither too fast nor too slow--suggesting that global economic growth will continue. The United States is expanding at a sustainable pace--for the third year in a row. The second largest economy in the world, Japan, has also been growing nicely, in contrast to its lost decade of the 1990s. China's rapid growth earlier in the year has slowed to a more sustainable pace, and the rest of Asia is again doing well after last year's SARS scare. In Latin America, growth has picked up in Mexico, Columbia, Peru, Chile, Brazil, and Argentina. Latin America grew at over 5 percent so far this year. Russia and most of the European economies are also growing strong. Even the French and German economies have shown signs of growth this summer.
Another difference from the events surrounding many past conferences had to do with interest rates. Interest rate spreads between emerging market bonds and U.S. Treasuries--an important measure of global risk--are at historically low levels. Spreads have come down markedly during the last two years. They have stayed down despite the forecasts early this year that spreads would rise sharply throughout the year as monetary tightening in the United States began.
Another measure of risk--volatility in currency markets--is also low. You can clearly detect this in the prices of currency options, but ask currency traders and they will tell you about it. The one element of risk that was discussed a lot at the conference was the high price of oil, but fortunately it had declined in the week before the conference.
Finally, there were no major inflation scare stories to talk about this year. Inflation is low and stable in the United States and Europe, and the persistent deflation in Japan is past its low point and price stability is expected soon. That benign inflation environment is more evidence that the global economic expansion should continue.
So what are international policy makers talking about this year? The formal topic of the Jackson Hole conference--demographic trends in the world economy--was far a field from the expertise of many participants, so conversations on this topic were short, usually expressing concerns that politicians need to start addressing the impact of aging populations on retirement and health programs.
Many of the conversations I was involved in, whether on hikes in the mountains or at meals and receptions, were about why economic times were so good and how long they would continue. I focused on the role of economic policies, whether in the United States, Japan, Brazil, or Turkey. The United States economy is growing--despite the setback of the downturn starting in 2000, the 9/11 terrorist attacks, and the corporate scandals--because of the timely response of monetary and fiscal policy, especially President Bush's tax cuts of 2001 and 2003. The Japanese economy is growing because Prime Minister Koizumi insisted on fundamental change, and monetary growth was increased and non-performing loans were reduced. Improved economic relations between the United States and Japan--led by President Bush and Prime Minister Koizumi--had a lot to do with these changes. Similar explanations hold for other good performances, including the high growth, declining inflation, low spreads under President Lula in Brazil and Prime Minister Erdogan in Turkey, two countries that had been plagued by crises in the recent past. As with Japan, support by the United States for these allies and their economic policies have been important. The path breaking Agenda for Growth with the G7 and the new Group for Growth with Brazil has reinforced and supported pro-growth policies by sharing experiences and knowledge.
What about the decline of crises and risk spreads and volatility? One reason they are down is because of the more credible focus on price stability by central banks--frequently aided by market-determined flexible exchange rates--which has largely ended the boom-bust cycle in many countries and is now laying the foundation for what may be the longest global boom we have ever seen. This trend began with the Federal Reserve years ago but has spread around the world in more recent years.
In addition, the international financial institutions have begun to reform, following calls by President Bush and his Administration. Important reforms include the greater clarity and predictability in the use of large-scale financing from the International Monetary Fund, the use of collective action clauses in emerging market debt, and the movement toward grants rather than loans at the World Bank. Such reforms themselves--while still very recent in their implementation--improve confidence, showing that international financial officials can work to make needed changes in the international financial system. Greater transparency has also helped to reduce contagion by enabling market analysts to better discriminate between countries that follow good policies and those that do not.
Usually the journalists who attend international conferences or who come to press briefings on my international trips report on the current economic events that come up in conversations or briefings. This year the journalists have not asked much and they have not written much about the remarkably good state of the world economy. I recently asked a number of the journalists why. Most agreed that the global economic situation was indeed unusually good, but none thought it was news worthy to ask or write about. The reason was that, while unusual, it was good news, not bad news. As one of the journalists told me, "We won a prize for our coverage of the terrible Russian financial crises in 1998. There is no way we could win a journalism prize for covering the current good state of the world economy. I'm not going to cover it. I'd be surprised if anyone here covers it."
