Bernanke Seeks New 'International Monetary System'
Accuses China of Currency Intervention, Warns of Rising Unemployment and "End of Tepid US Recovery"
In speeches before a European Central Bank conference in Frankfurt, Ben Bernanke went on an unprecedented attack, accusing China of throwing a monkey wrench into the global recovery, blaming China for slow global growth and a potential "End to the Tepid U.S. Recovery".
He also said "The current international monetary has a structural flaw" calling on the "global community, over time, to devise an international monetary system that more consistently aligns the interests of individual countries with the interests of the global economy as a whole."
Finally, he put up a misguided defense of Quantitative Easing that is sure to not go over well in the global community.
If Bernanke was trying to spook the markets, provoke China, cause a currency war, and get Congress to launch an extremely foolish set of tariffs, he would have been hard pressed to deliver a more powerful speech.
Please consider Bernanke turns up heat on China currency policy.
Federal Reserve Chairman Ben Bernanke put aside traditional central bank niceties and launched a direct attack on the slow pace of China's steps to strengthen its currency.
In a speech prepared for a conference at the European Central Bank on Friday morning, Bernanke said that China's decision to undervalue the yuan has essentially thrown a monkey wrench into the global economic recovery.
The result could be slow growth ahead "for everyone," he said.
Bernanke's remarks do not lower the temperature of the debate. Instead, he launched a fierce defense of the Fed's bond-purchase plan, also known as "quantitative easing II."
"On its current economic trajectory, the United States runs the risk of seeing millions of workers unemployed or underemployed for many years," Bernanke said.
The Fed could not rule out the possibility that unemployment "might rise further in the near term," he said. This could bring an end to the tepid U.S. recovery, he said.
He pointed his finger at China's slow adjustment of its exchange rate.
"The strategy of currency undervaluation has demonstrated important drawbacks, both for the world system and for the countries using that strategy," Bernanke said.
China's strategy of export-led growth "cannot ultimately succeed if the implications of that strategy for global growth and stability are not taken into account," he said.
"Currency undervaluation by surplus countries is inhibiting needed international adjustment and creating spillover effects that would not exist if exchange rates better reflected market fundamentals," Bernanke said.
"Unfortunately, so long as exchange-rate adjustment is incomplete and global growth prospects are markedly uneven, the problem of excessively strong capital inflows to emerging markets may persist," Bernanke said.
Rebalancing the Global Recovery
The text of one speech in Frankfort is on the Federal Reserve Website Emerging from the Crisis: Where Do We Stand? It's not worth a read as it contains none of the above fireworks.
His speech Rebalancing the Global Recovery is the one to read. Here are a few snips.
In my view, the use of the term "quantitative easing" to refer to the Federal Reserve's policies is inappropriate. Quantitative easing typically refers to policies that seek to have effects by changing the quantity of bank reserves, a channel which seems relatively weak, at least in the U.S. context. In contrast, securities purchases work by affecting the yields on the acquired securities and, via substitution effects in investors' portfolios, on a wider range of assets.
Global Policy Challenges and Tensions
The two-speed nature of the global recovery implies that different policy stances are appropriate for different groups of countries.
The exchange rate adjustment is incomplete, in part, because the authorities in some emerging market economies have intervened in foreign exchange markets to prevent or slow the appreciation of their currencies.
It is striking that, amid all the concerns about renewed private capital inflows to the emerging market economies, total capital, on net, is still flowing from relatively labor-abundant emerging market economies to capital-abundant advanced economies.
A key driver of this "uphill" flow of capital is official reserve accumulation in the emerging market economies that exceeds private capital inflows to these economies. The total holdings of foreign exchange reserves by selected major emerging market economies, shown in figure 9, have risen sharply since the crisis and now surpass $5 trillion--about six times their level a decade ago. China holds about half of the total reserves of these selected economies, slightly more than $2.6 trillion.
Given these advantages of a system of market-determined exchange rates, why have officials in many emerging markets leaned against appreciation of their currencies toward levels more consistent with market fundamentals? The principal answer is that currency undervaluation on the part of some countries has been part of a long-term export-led strategy for growth and development. This strategy, which allows a country's producers to operate at a greater scale and to produce a more diverse set of products than domestic demand alone might sustain, has been viewed as promoting economic growth and, more broadly, as making an important contribution to the development of a number of countries. However, increasingly over time, the strategy of currency undervaluation has demonstrated important drawbacks, both for the world system and for the countries using that strategy.
Improving the International System
The current international monetary system is not working as well as it should. Currency undervaluation by surplus countries is inhibiting needed international adjustment and creating spillover effects that would not exist if exchange rates better reflected market fundamentals.
As currently constituted, the international monetary system has a structural flaw: It lacks a mechanism, market based or otherwise, to induce needed adjustments by surplus countries, which can result in persistent imbalances. This problem is not new. For example, in the somewhat different context of the gold standard in the period prior to the Great Depression, the United States and France ran large current account surpluses, accompanied by large inflows of gold. However, in defiance of the so-called rules of the game of the international gold standard, neither country allowed the higher gold reserves to feed through to their domestic money supplies and price levels, with the result that the real exchange rate in each country remained persistently undervalued. These policies created deflationary pressures in deficit countries that were losing gold, which helped bring on the Great Depression.3 The gold standard was meant to ensure economic and financial stability, but failures of international coordination undermined these very goals. Although the parallels are certainly far from perfect, and I am certainly not predicting a new Depression, some of the lessons from that grim period are applicable today.4 In particular, for large, systemically important countries with persistent current account surpluses, the pursuit of export-led growth cannot ultimately succeed if the implications of that strategy for global growth and stability are not taken into account.
Thus, it would be desirable for the global community, over time, to devise an international monetary system that more consistently aligns the interests of individual countries with the interests of the global economy as a whole. In particular, such a system would provide more effective checks on the tendency for countries to run large and persistent external imbalances, whether surpluses or deficits. Changes to accomplish these goals will take considerable time, effort, and coordination to implement. In the meantime, without such a system in place, the countries of the world must recognize their collective responsibility for bringing about the rebalancing required to preserve global economic stability and prosperity. I hope that policymakers in all countries can work together cooperatively to achieve a stronger, more sustainable, and more balanced global economy.
Preaching to the World
Bernanke is a man who could not find his ass with both hands and a roadmap when it comes to spotting the housing bubble, the recession, and levels of unemployment, yet he preaches to the world as if he has all the answers.
He is so hellbent on preventing deflation that he cannot see anything else. It would help if he even understood what it was. It sure would help if he could understand that rising prices without rising wages will crucify the average citizen.
But he is as blind, stubborn, academic wonk with no real world experience or common sense. I would love to debate him any day of the week.
The one thing I agree with Bernanke on is in regards to the term Quantitative Easing. We should simply call "Printing Money" or "Monetizing the National Debt". The former has the advantage in that most of the population would have a chance at understanding the term.
In regards to China, it bears repeating that what China is doing is no more manipulative that what the Fed is doing. In fact, a good case could be made that China's buildup of excess reserves has its origins in the housing bubble the Greenspan and Bernanke Fed blew.
His defense of 2% inflation targeting is beyond idiotic. The last thing 14 million unemployed people need is rising prices.
The other thing I agree with Bernanke on is the need for a "new" monetary system. The thing is, what's needed is not entirely new. We need a gold standard and the end of fractional reserve banking.
In his speech, Bernanke blamed gold for causing the great depression. Nothing could be further than the truth. It was a runup in excessive credit accompanied by micromanagement of interest rates by the Fed that kicked off the Great Depression.
Wittingly or unwittingly, Bernanke may have just incited Congress in two ways. The first way is Congress is unlikely to back down on how it sees QE. The second, more serious way is Bernanke may have just incited Congress to label China a "Currency Manipulator" and enact a bunch of horrendously foolish tariffs.
Heaven help us all if that is the result. It will not matter one bit whether or not that was his intention.