Bernanke Defends Fed’s Policy, Turns Tables on China

Nov. 19 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke took his defense of the U.S. central bank’s monetary stimulus abroad, saying it will aid the world economy, and implicitly criticized China for keeping its currency weak.

The best way to underpin the dollar and support the global recovery “is through policies that lead to a resumption of robust growth in a context of price stability in the United States,” Bernanke said in prepared remarks to a conference later today in Frankfurt. Countries that undervalue their currencies may eventually inhibit growth around the world and risk financial instability at home, he said.

http://noir.bloomberg.com/apps/news?pid=20601087&sid=als5hw8.rj0w&pos=1

That´s the real reason for QE II !!!! Creation of jobs ? LOL !!!! Bullsh1t.

 

The People’s Bank of China sure knows how to gatecrash a party.

In an uncanny coincidence, the PBOC lifted bank reserve requirements 50bps – widely seen as a step against QE-inspired capital flows – just as Fed chairman Ben Bernanke rose to speak at the European Central Bank on, erm, the merits of QE.

Quantitative tightening versus quantitative easing, on live TV.

Although for Mr Bernanke defence is seemingly the best form of attack. In his speech on Friday morning in Europe, Bernanke hit back at those who accuse QE2 of encouraging inflation – at home and abroad.

Let’s see how Bankman did it:

1. Ka-pow! Defending the Fed’s monetary policy.

Echoing FT Alphaville’s analysis of recent figures, Bankman points out that key data are not hinting at inflationary pressures:

… various measures of underlying inflation have been trending downward and are currently around 1 percent, which is below the rate of 2 percent or a bit less that most Federal Open Market Committee (FOMC) participants judge as being most consistent with the Federal Reserve’s policy objectives in the long run. With inflation expectations stable, and with levels of resource slack expected to remain high, inflation trends are expected to be quite subdued for some time.

Thus, QE2 is safe, for now:

This policy tool [QE2] will be used in a manner that is measured and responsive to economic conditions. In particular, the Committee stated that it would review its asset-purchase program regularly in light of incoming information and would adjust the program as needed to meet its objectives … In that regard, it bears emphasizing that the Federal Reserve has worked hard to ensure that it will not have any problems exiting from this program at the appropriate time.

Back off hawks – Bankman has it under control.

2. Boff! Hinting at support for further fiscal expansion.

First, in case you had forgotten:

The Federal Reserve is nonpartisan and does not make recommendations regarding specific tax and spending programs.

Or does it?

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.

3. Zap! Calling for exchange rate appreciation in emerging economies.

Now for the really fun stuff. Bankman noted that the global recovery has a ‘two-speed nature’: off slow (advanced economies) and on fast (emerging economies). Therefore, different strokes for different folks: distinct yet interlocking policy stances are needed to rebalance the global economy.

But, he added, those in the fast lane haven’t been playing ball. In a nutshell:

Notably, in recent months, some officials in emerging market economies and elsewhere have argued that accommodative monetary policies in the advanced economies, especially the United States, have been producing negative spillover effects on their economies. In particular, they are concerned that advanced economy policies are inducing excessive capital inflows to the emerging market economies, inflows that in turn put unwelcome upward pressure on emerging market currencies and threaten to create asset price bubbles.

So, today, he hit back hard, with a graph:



Which, um, seems to show that capital flows to emerging economies have picked up in recent months (though haven’t yet reached 2007 levels). In any case, here’s the beef:

However, beyond these fundamental factors, an important driver of the rapid capital inflows to some emerging markets is incomplete adjustment of exchange rates in those economies, which leads investors to anticipate additional returns arising from expected exchange rate appreciation.

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.

Which, on a chart, looks like this (selections ours):



No prizes for guessing where the finger is pointing. Whereas the Rupee (for instance), has seen a real adjustment of over 10 per cent, the Renminbi (again, for instance) has barely budged.

So, what to do? Here, Bankman gives us a little lesson entitled foreign exchange 101:

It is instructive to contrast this situation with what would happen in an international system in which exchange rates were allowed to fully reflect market fundamentals. In the current context, advanced economies would pursue accommodative monetary policies as needed to foster recovery and to guard against unwanted disinflation. At the same time, emerging market economies would tighten their own monetary policies to the degree needed to prevent overheating and inflation. The resulting increase in emerging market interest rates relative to those in the advanced economies would naturally lead to increased capital flows from advanced to emerging economies and, consequently, to currency appreciation in emerging market economies.

Ta-da! In the short run this is quixotic tough. So, for the moment Bankman says:

… countries of the world must recognize their collective responsibility for bringing about the rebalancing required to preserve global economic stability and prosperity.

In other words: please, China, appreciate.

And if we don’t adopt the free (floating) market solution?

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. 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.

http://ftalphaville.ft.com/blog/2010/11/19/410201/bernanke-its-not-me-its-you/

 

While Bernanke didn’t identify China in his speech, he took aim at “large, systemically important countries with persistent current-account surpluses.”

LOL
Maybe Bernanke thinks a persistent current account deficit is the way to go.

I think if I was Chinese I really would dump all their US Treasuries now and shift into Gold.

 

You are stupid, Chinese are not. If they dump treasuries, the dollar will collapse, bond yields will rise, US will go into recession and that will effectively act as a tax on Chinese goods.

Then , there will be import tariffs. China will enter into recession, unrest, and possibly dissintegrate into chaos.

So stop loling like an idiot if you do not unerstand how international trade works but instead you proposing stupid solutions.

China is in a terrible position. It has created overcapacity like the Germans. The difference is that Germans produce high quality goods and have stupid customers like the PIIGS who went into debt to live their dream in exchange for EU membership. China has a lot of competitors. India is waiting around the corner. Japan wants to come back. Korea too.

China has to lower its expectation to remain a viable trade partner of the US. It got enough. It cannot get everything.

 

dumb.