Economic Letter

By the beginning of the 1980s, double-digit rates of inflation had become so pervasive among industrialized economies that they were viewed as a major deterrent to global economic growth. Since then, an explicit policy goal of low inflation has become a mantra for policymakers, and many countries, such as the U.K., New Zealand, Australia, Japan, Sweden, and the eleven countries under the European Central Bank (ECB), have enacted fundamental reforms to achieve that goal.

Since 1994, depository institutions have been able to lower required reserves without affecting customer liquidity by periodically reclassifying balances from retail transactions deposits into savings accounts. This practice, known as “sweeping,” has grown rapidly in the last six years, and, as a result, reserve requirements as a percentage of total liquid deposits have fallen dramatically.

Economists are often accused of not agreeing with each other. Believe it or not, the 1990s may have produced an exception.

More than three years have passed since the collapse of the Thai baht triggered a wave of currency and financial crises in East Asia. After experiencing sharp economic contraction in 1998, East Asian economies have rebounded strongly, buttressed by rapid growth in their exports to the United States.

Over the last year the U.S. current account deficit has reached unprecedented levels. Figure 1 illustrates this by charting the falling trajectory of the current account balance, which essentially measures net exports of goods and services plus net income received from foreign investments.

During the 1990s, the global economy experienced a major increase in trade and cross-border business activity, which created a greater demand for international financial services. Consequently, many commercial banks increased their cross-border activities, both to service their domestic customers and to gain new foreign customers.

Productivity growth in the U.S. has picked up noticeably in recent years. From 1996 to 1999, average labor productivity, or ALP, in the private, nonfarm U.S. economy grew at a 2.8% annual rate, more than twice the rate that prevailed between 1980 and 1995.

After several years of rising to ever greater heights, bank profits took a dive in the second quarter, with return on assets (ROA) falling to 1.0%, the lowest it has been since 1992 (see Table “Banks Headquartered by Region”). The reason: poor performance at large banks, which had an ROA of 0.94%.