–Large, Persistent Imbalances in Current Accounts Post Growing Risk
By Denny Gulino
WASHINGTON (MNI) – Federal Reserve Chairman Ben Bernanke told
central bankers Friday that a structurally flawed international monetary
system that perpetuates persistent global imbalances threatens everyone
with eventual slow growth.
Bernanke used back-to-back appearances in Frankfurt to warn of
self-defeating export-led growth strategies are placing the burden of
adjustment on advanced economies with flexible exchange rates upon which
developing economies ultimately depend.
Much of his criticism appeared aimed squarely at China. One of the
charts he used to illustrate his arguments identified China, Taiwan and
Hong Kong has having constrained the adjustment of their currencies the
most.
Ultimately, he said, export-led growth strategies that depend on
undervalued currencies cannot succeed, because it hobbles the growth of
advanced economies — their export customers.
He repeated his defenses of the Fed’s new QE2, although taking
issue with the name bestowed upon it. “Quantitative ease,” he said,
“refers to policies that seek to have effects by changing the quantity
of bank reserves” and that’s a channel that, in the U.S., “seems
relatively weak.”
“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,” he said.
He also answered his many critics on the question of whether the
Fed’s new accommodation weakens the dollar, saying much of the apparent
weakness has been in the wake of the dollar’s spring runup. But he went
beyond that to point again to the heavy foreign exchange intervention
practices by some countries, which he said forces the market-oriented
regimes to shoulder the burden of adjustment.
With emerging economies having fully recovered from the crisis,
some with the help of currency undervaluation to the disadvantage of
market-based exchange rates, “Globally, both growth and trade are
unbalanced, as reflected in the two-speed recovery and in persistent
current account surpluses and deficits. Neither situation is
sustainable,” he said.
“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 if the recovery in the advanced economies falls
short,” he warned. “Large and persistent imbalances in current accounts
represent a growing financial and economic risk.”
Overall, Bernanke concentrated on risks and the flaws evident to
him in the international financial system, not on progress made after
the crisis.
In recent months, he said, “that sense of common purpose has waned”
after being so successful in tempering the crisis. “Tensions among
nations over economic policies have emerged and intensified, potentially
threatening our ability to find global solutions to global problems.”
While once source of tensions has been the uneveness of recovery,
with some entirely recovered and others lagging, “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 interests of the international system as a whole,” he
said.
“Accordingly,” he continued, “the essential challenge for
policymakers around the world is to work together to achieve a mutually
beneficial outcome — namely, a robust global economic expansion that is
balanced, sustainable, and less prone to crises.”
The venue for Bernanke’s prepared remarks was the Sixth European
Central Bank Central Banking Conference in Frankfurt, followed by a
panel discussion among central bankers, with Bernanke scheduled to be
sitting alongside ECB President Jean-Claude Trichet.
Bernanke said in his speech that prior to the Great Depression it
was the United States and France that ran large current account
surpluses and did not allow others to adjust.
“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,” Bernanke said. “These policies
created deflationary pressures in deficit countries that were losing
gold, which helped bring on the Great Depression.”
He said he is not forecasting another Great Depression, but “some
of the lessons from that grim period are applicable today.”
Bernanke’s speech covered a lot of ground, stating that
the Federal Open Market Committee is “fully aware” of the
global role of the dollar but repeating, the dollar is best
served by restoring U.S. growth.
He found it “striking” that despite the complaints of excessive
capital inflows to emerging economies, that the net capital flows are
still to the countries with plenty of capital from the countries with
plenty of labor resources.
Nevertheless, without the kind of global adjustment made difficult
by the policies of currency undervaluation, he said, that rush of
capital to emerging markets may not end. “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,” he said..
For the U.S. the “current economic trajectory” is not acceptable.
“On its current economic trajectory the United States runs
the risk of seeing millions of workers unemployed or underemployed for
many years,” he said. “As a society, we should find that outcome
unacceptable.”
“Monetary policy is working in support of both economic recovery
and price stability, but there are limits to what can be achieved by the
central bank alone,” he continued. “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.”
He repeated that the latest accommodative measures are to be
reviewed “regularly” by the Fed and can be adjusted.
** Market News International Washington Bureau: 202-371-2121 **
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