By Denny Gulino
WASHINGTON (MNI) – The surprising speech by Federal Reserve
Chairman Ben Bernanke Friday acted as a sharp edged prism, diffracting
his critics into categories that fall into less familiar combinations.
Suddenly those on Capitol Hill who want to get tough on China and
also diminish the Fed are finding Bernanke can be an ally.
And those who see the Fed as adding to stimulus instead of
concentrating only on inflation are seeing Bernanke emphasizing more
higher private and public savings and a growth-oriented and reformed
fiscal policy.
Meanwhile, less well highlighted than Bernanke’s criticism of
surplus countries was his advice to his own United States, a deficit
country, advice undoubtedly directed at the fiscal authority, Congress.
“Deficit countries need to do more over time to narrow the gap
between investment and national saving,” he said. “In the United States,
putting fiscal policy on a sustainable path is a critical step toward
increasing national saving in the longer term. Higher private saving
would also help. And resources will need to shift into the production of
export- and import-competing goods.”
Yet the first reaction in the headlines, that Bernanke was slamming
China, was evidently not exactly what the Fed chairman had in mind,
judging by his comments after the Frankfurt speech in the subsequent
panel discussion.
Commenting on global imbalances, as MNI reported, Bernanke
suggested it did not make any sense to criticize individual countries
for their surpluses or deficits. “Deficits and surpluses are generated
by many countries’ behaviour, not one single country.”
Chart No. 8 in Bernanke’s presentation showed several other
countries have constrained adjustment in their currencies and tallied up
surpluses: China, Taiwan, Hong Kong, Poland, Korea and Singapore all kept
their currencies from appreciating less than 5% in the year through
September. In fact, Taiwan and Hong Kong actually depreciated their
currencies in that period.
The same chart showed that, proportionate to their GDP, Taiwan,
Thailand, Singapore and Hong Kong accumulated more reserves than China
though China alone, he pointed out in his speech, has half of the total,
slightly more than $2.6 trillion.
What seemed to surprise even more than the concepts — most of
which Bernanke had previously talked about individually in speeches and
testimony, as had other officials — was the dominant dark tone of the
speech.
Bernanke focused not on recovery progress since the start of the
crisis but on warnings about the future, spanning an extraordinary total
of more than two dozen warning and examples of what has not improved:
1) International cooperation so evident during the early part of
the crisis was then. Now, “that sense of common purpose has waned.
Tensions among nations over economic policies have emerged and
intensified, potentially threatening our ability to find global
solutions to global problems.”
2) “At a deeper level, the tensions arise from the lack of an
agreed-upon framework to ensure that national policies take appropriate
account of interdependencies across countries and the interest of the
international system as a whole.”
3) “The increase of 5 percentage points in the U.S. unemployment
rate is roughly double that seen in the euro area, the United Kingdom,
Japan or Canada.”
4) “Low rates of resource utilization in the United States are
creating disinflationary pressures.”
5) “Insufficiently supportive policies in the advanced economies
could undermine the recovery not only in those economies, but for the
world as a whole.”
6) “We cannot rules out the possibility that unemployment might
rise further in the near term.”
7) “Declines in actual and expected inflation imply both higher
realized and expected real interest rates, creating further drags on
growth.”
8) “On its current economic trajectory the United States runs the
risk of seeing millions of workers unemployed or underemployed for many
years.”
9) “Differences in the cyclical position and policy stances of the
advanced and emerging market economies have intensified the challenges
for policymakers around the globe.”
10) “The exchange rate adjustment is incomplete, in part, because
the authorities in some emerging market economies have intervened in
foreign exchanges markets to prevent or slow the appreciation of their
currencies.”
11) “Increasingly over time, the strategy of currency
undervaluation has demonstrated important drawbacks, both for the world
system and for the countries that use that strategy.”
12) “Because a strong expansion in the emerging market economies
will ultimately depend on a recovery in the more advanced economies,
this pattern of two-speed growth might very well be resolved in favor of
slow growth for everyone.”
13) “The total holdings of foreign exchange reserve by selected
major emerging market economies … have risen sharply since the crisis
and now surpass $5 trillion — about six times their level a decade
ago.”
14) “Currency undervaluation on the part of some countries has been
part of a long-term export-led strategy for growth and development.”
15) “Globally, both growth and trade are unbalanced, as reflected
in the two-speed recovery and in persistent current account surpluses
and deficits.”
16) “Large and persistent imbalances in current accounts represent
a growing financial and economic risk.”
17) “Those countries that allow substantial flexibility in their
exchange rates bearing the greatest burden.”
18) “Countries that maintain undervalued currencies may themselves
face important costs at the national level, including a reduced ability
to use independent monetary policies to stabilize their economies and
the risks associated with excessive or volatile capital inflows.”
19) “The current international monetary system is not working as
well as it should.”
20) “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.”
21) “Differences in the degree of currency flexibility impose
unequal burdens of adjustment, penalizing countries with relatively
flexible exchange rates.”
22) “Deficit countries need to do more over time to narrow the gap
between investment and national saving.”
23) “Some emerging market economies do not have the infrastructure
to support a fully convertible, internationally traded currency and to
allow unrestricted capital flows.”
24) “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.”
25) “As currently constituted, the international monetary system
has a structural flaw. It lacks a mechanisms, market based or otherwise,
to induce needed adjustments by surplus countries, which can result in
persistent imbalances.”
26) “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.”
In the context of Washington’s intense partisanship which is
sustaining itself past the election, a key question following Bernanke’s
speech is whether his views will encourage Congress to increasingly
pressure China in the year ahead.
Some would see that as rash, others overdue.
Whatever the political leaning, members of Congress have shown that
bashing China is always easier than curing deficits.
But if they are looking for the easy way out, or if the new
majority plans to block stimulus measures in the exclusive quest for
deficit reduction, they should take heed of Bernanke’s plea:
“The Federal Reserve is nonpartisan and does not make
recommendations regarding specific tax and spending programs. However,
in general terms, a fiscal program that combines near-term measures to
enhance growth with strong, confidence-inducing steps to reduce
longer-term structural deficits would be an important complement to the
policies of the Federal Reserve.”
** Market News International Washington Bureau: 202-371-2121 **
[TOPICS: M$U$$$,MMUFE$,MGU$$$,MFU$$$,M$A$$$,MI$$$$,M$Q$$$,MN$FX$]
