Tags: Fed | Reserve | Donald | Kohn

Fed Member: US Economy Must Rely Less on Debt

Tuesday, 11 May 2010 08:32 AM

The U.S. economy should rely less on debt to finance consumer spending and more on savings, a senior member of the U.S. Federal Reserve Board said Tuesday.

Donald Kohn, the Fed board's vice chairman and second-highest ranking official, said exports and capital investments also needed to increase to rebalance years of debt-fueled U.S. consumption that exacerbated the recent global economic downturn.

"The U.S. economy will need to be less driven by consumption and housing and will need to rely less on debt to finance spending on consumption and housing," Kohn told a one-day meeting of central bankers and global financiers in Zurich, according to comments posted on the Fed's website.

Kohn said one of the strongest arguments for greater savings was the aging U.S. population, which "will pose severe challenges in the decades to come."

Efforts to reform the global financial system should examine "opportunities to improve incentives for private saving" and would "almost certainly involve increases in national saving," he said.

This would require other nations to rely less on exports to the United States and more on domestic consumption, Kohn said.

Some countries would have to allow their currencies to rise, he said, hinting at an often repeated U.S. concern that China is keeping its currency artificially low to spur exports.

"More flexible exchange rates will help domestic demand fill in the gap left once foreign demand falls back to a more sustainable level," Kohn said. "More flexible exchange rates also provide domestic policymakers greater scope to focus on domestic goals of full employment and price stability."

Kohn, who plans to leave his post at the end of June, has been a member of the Fed board since 2002.

Among the speakers at the closed-doors meeting in Zurich hosted by the Swiss National Bank and the International Monetary Fund was George Soros, the Hungarian-born financier who made millions betting against currencies in the 1990s.

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The U.S. economy should rely less on debt to finance consumer spending and more on savings, a senior member of the U.S. Federal Reserve Board said Tuesday. Donald Kohn, the Fed board's vice chairman and second-highest ranking official, said exports and capital investments...
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Tuesday, 11 May 2010 08:32 AM
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