Ben Bernanke's Views on Global Economic Policy

He writes:

FRB: Speech, Bernanke--U.S. current account deficit--April 14, 2005 : I disagree with the view... that balancing the federal budget by itself would largely defuse the current account issue.... [E]ven if we could balance the federal budget tomorrow, the medium-term effect would likely be to reduce the current account deficit by less than one percentage point of GDP. [More likely 1.5-2%, IMHO.]

Although I do not believe that plausible near-term changes in the federal budget would eliminate the current account deficit, I should stress that reducing the federal budget deficit is still a good idea. Although the effects on the current account... would likely be relatively modest, at least the direction is right. Moreover, there are other good reasons to bring down the federal budget deficit.... Similar observations apply to policy recommendations to increase household saving in the United States.... Although the effect of saving-friendly policies on the U.S. current account deficit might not be dramatic, again the direction would be right. Moreover, increasing U.S. national saving from its current low level would support productivity and wealth creation and help our society make better provision for the future.

However, as I have argued today, some of the key reasons for the large U.S. current account deficit are external to the United States... purely inward-looking policies are unlikely to resolve this issue. Thus a more direct approach is to help and encourage developing countries to re-enter international capital markets in their more natural role as borrowers... improve their investment climates by continuing to increase macroeconomic stability, strengthen property rights, reduce corruption, and remove barriers to the free flow of financial capital. Providing assistance to developing countries in strengthening their financial institutions--for example, by improving bank regulation and supervision and by increasing financial transparency--could lessen the risk of financial crises and thus increase both the willingness of those countries to accept capital inflows and the willingness of foreigners to invest there....

Other changes will occur naturally... the pace at which emerging-market countries are accumulating international reserves should slow.... Domestic investment in East Asia and in other emerging markets will eventually recover.... The various factors underlying the U.S. current account deficit--both domestic and international--are likely to unwind only gradually, however. Thus, we probably have little choice except to be patient...

Comments

[Movie Guy]

The Great Collapse

Phase I: Trade Policy, Income Extraction, and Wages

Phase II: Social Security, Medicare, Medicaid, private healthcare insurance costs

Phase III: Massive Debts and Trading Wars

Phase IV: Major Military War

[anne]

Ben Bernanke's speech was clever, but conjectural and I think essentially wrong. Robert Rubin commented that the international capital inflow to America from 1995 to 2000 was a sign of investment opportunity and economic strength. The inflow then was primarily private capital. Household saving was low, but the government deficit was declining rapidly and would turn to a surplus. The dollar reflected our economic strength.

From 2001 there has been less and less private capital flowing to American investment, and more foreign central bank purchase of American debt as our balance of trade deteriorated. Household saving is minimal and a government surplus has turned sharply and servely to deficit. The dollar has weakened. Savings in China and Japan and Brazil and South Africa is not flowing to America primarily because of a surplus of saving internationally and investment opportunity here. Rather capital is flowing to America to fund a trade deficit that is a necessary result of a lack of private saving and a severe government deficit.

[wkwillis]

Movie Guy
Nah, like this.
1 US dollar collapses
2a US cars, crude, computers, coffee imports collapse
2b UN cars, crude, computers, coffee exports collapse
3a US inflation from money chasing less goods
3b UN deflation from money chasing more goods
4a1 US builds mines, smelters, power plants, factories
4a2 US population shifts to the flyover countryside
4a3 US housing prices collapse in metrocoastal region
4b1 UN less efficient factories and farms shut down
4b2 UN forms Brussels Club to allocate American assets
4b3 UN Swiss bank accounts default
5a UN complains about US inflationary default
5b US mentions WWI debts, Imperial Chinese bonds, etc

Of course, that assumes everyone behaves reasonably and responsibly. Which leads to the question of how we ever got into this mess.

[Winslow R.]

"[E]ven if we could balance the federal budget tomorrow, the medium-term effect would likely be to reduce the current account deficit by less than one percentage point of GDP. [More likely 1.5-2%, IMHO.]"

**It all depends on whether the budget was balanced on the backs of the rich or poor. Looks like your "opinion" is new taxes would be added to middle class/poor which would not only reduce the trade deficit but also GDP. Bernanke thinks the new taxes would be put on the rich. I would tend to agree with Bernanke since taxing the middle class would be political suicide.

"Rather capital is flowing to America to fund a trade deficit that is a necessary result of a lack of private saving and a severe government deficit."

Still think you need to see capital inflows from Japan, China, Brazil as "buying markets" to keep masses employed.

[Fred]

Does he really mean "increase household saving" - wouldn't that trigger a slowdown? It seems like we are urged to both save (to "support productivity and wealth creation") and spend to keep the economy humming along. This has always confused me. Or maybe some segments of society are supposed to save and others to spend? Anyway, it's hard to save when real interest rates are negative (thanks to Fed policies).

[anne]

Winslow R

"Still think you need to see capital inflows from Japan, China, Brazil as "buying markets" to keep masses employed."

Agreed. But, that is the nature of evolving trade relation whether with China or Europe. Look to the European system of agricultural subsidies or to ours, there is much more. There is always such tension to international trade and market development.

[anne]

Fred

There is a serious question as to whether interest rates are negative. The bond market suggests not, but we might argue the issue. Still, saving is absolutely called for individually for there are attractive long term investment opportunities and the need for saving is the need for future investment income. Household saving is 0.6%. Astonishing, and short sighted in the extreme. Saving is warranted.

[anne]

We would surely not be welcoming higher interest rates.

[Fred]

Anne - "...there are attractive long term investment opportunities" Really? Stocks are overvalued on a historical basis, especially the attractive ones, pay little or no dividends, and don't look like a good bet heading into a recession. Bonds also look questionable unless you're betting on deflation. After reading this blog for a month or so, I get the feeling the world economic situation is very precarious. No safe ports for the coming storm? Maybe this is why many people are investing in their homes.

[anne]

Fred

Think ahead, several years ahead. When there is a moment I will address the issue, but we really should be saving and investing just now.

[James Whiting]

Why would you expect US investors to act differently from foreign investors? There is little foreign private investment in the US because returns are too low to justify the risks. The same is true for domestic investors.

The real problem is foreign central banks accepting negative returns (after inflation and expected currency adjustments) on their investments. With central banks holding down interest rates, there is no incentive for saving. The US is likely to do either an inflationary default on its debt or else an exchange rate default. Which means that the Asians are paying for Bush's tax cuts. Just imagine how much lower interest rates in this country would be if it weren't for the huge deficits. Lower interest rates would increase borrowing and spending, which would increase inflation. The US government is acting in its own best interest with respect to the size of the deficit. It is the Asian central banks that are screwing with the bond markets and disrupting market forces that prevents savings in this country from increasing. I don't understand why they are doing it, as they would probably have more economic benefit in their own countries if they spent the money instead of giving it to us so that we can buy things from them.

[Winslow R.]

" I don't understand why they are doing it, as they would probably have more economic benefit in their own countries if they spent the money instead of giving it to us so that we can buy things from them."

1) It would require a "wealth redistribution" from rich to poor which tend to be involuntary.

2) It would expose countries to speculative attack as their "reserves" were spent by the masses, look at 1997 currency crisis.

3) Once the masses became accustomed to a higher standard of living, it becomes very difficult for a goverment to reduce that standard and remain in power, again look at 1997 currency crisis.

[Movie Guy]

James Whiting -- "It is the Asian central banks that are screwing with the bond markets and disrupting market forces that prevents savings in this country from increasing. I don't understand why they are doing it, as they would probably have more economic benefit in their own countries if they spent the money instead of giving it to us so that we can buy things from them."

Come on, now.

Where would we get such goods if we didn't buy them cheaply from China (or Asia)? We certainly don't make those particular finished goods in the USA anymore.

We GAVE AWAY our production of such finished goods, and much of it is now consolidated in China as opposed to being spread out throughout Asia. We turned our back on 'old technology manufacturing' of finished goods. Remember? We didn't want that employment base anymore. I've heard plenty of economists and market heavies say it. Dummies.

Rest assured, though, that China's currency will be revalued and export pricing from China will eventually increase. But don't expect China's or Asia's export production of general finished goods to return to the USA. It's not going to happen. It will bounce around the planet chasing cheaper means of production.

We will still have our import-export imbalance problem.

If the dollar goes through another round of devaluation, our quantity of imports will likely decline but not necessarily the overall dollar value.

Households may not benefit from such changes. Not at all.

[D. Barnes]

Winslow wrote:

"Still think you need to see capital inflows from Japan, China, Brazil as "buying markets" to keep masses employed."

Anne wrote:

"Agreed. But, that is the nature of evolving trade relation whether with China or Europe. Look to the European system of agricultural subsidies or to ours, there is much more. There is always such tension to international trade and market development."

China is using the 'macro' tool of currency manipulation, where Europe/U.S. use the 'micro' tool of subsidies to purchase markets. The primary difference is the scope of manipulation or how well the manipulation is targeted.

[Movie Guy]

Correction:

The Great Collapse

Phase I: Trade Policy, Income Extraction, and Wages

Phase II: Social Security, Medicare, Medicaid, private healthcare insurance costs

Phase III: Massive Debts and Trading Wars

Phase III.1: wkwillis' post

Phase IV: Major Military War

[anne]

D Barnes

America encouraged and welcomed the Chinese Yuan-dollar peg from 1994. The need for China was international currency stability for the Yuan, and that was gained even through the Asian currency crisis of 1998. China managed well with the rising value of the dollar, and China surely did not plan on the dollar weakening. There was seemingly no problem when the value of the dollar was rising, now there is a problem both for China and for us for different domestic reasons. There will come a change in currency valuation, but remember we have gained much from the trade relations and the capital flow from China as they have gained in demand development and investment.

[anne]

James Whiting

"Why would you expect US investors to act differently from foreign investors? There is little foreign private investment in the US because returns are too low to justify the risks. The same is true for domestic investors."

There are many ways to invest, from buying broad stock and bond index funds on a regular basis, no matter supposed economic or market conditions, and assuming there will be compounding of returns over time no matter any particular days purchase, to thinking we can find attractive values and slanting to those values. Though I may have some specific ideas of values, I can not know the future. So I save as I can, look to what I take as attractively priced, and invest with a thought that time will count. The idea is to have a fine income stream years from now, and waiting for years from now to invest makes little sense to me.

[D. Barnes]

Anne

I would think most of our benefits were very short-term (immediate consumption)or very long-term (China will be a partner). Near term, much damage to the U.S. economy has been done with asset bubble led consumption.

BTW, I find targeted support for strategic industries (food supply) to be acceptable.

[Joe]

anne:
"We would surely not be welcoming higher interest rates."

Really ? What if I'm not in a state to invest, old and retired
or saving to buy a house/going to college? (need low risk)?

Why not? The perverse influence of low rates is what
drives asset prices - borrow at little or not cost and
invest in non-producing assets, hoping to flip the
asset to the next buyer.

I think history will not be kind to Uncle Greenspan.

It would have been a different matter, if the low interest
rates were driving productive investment for future returns.
That however is nowhere to be seen. Businesses are not
investing, just generating cash.

Hoepfully this entire pretense of a bunch of geezers divining
what is the interest rate will come to an end after this cycle.

[wkwillis]

Movie Guy
I try to be an optimist. If the world ends, no one will remember, and if the world doesn't end, all is well.

[Ari]

Brad DeLong has not faulted monetary policy in this cycle, nor would I. We have had solid central bank policy for 25 years. The purpose of the Fed is not to regulate asset prices. Brad and Anne seem right, we have needed these low interest rates, and we need just the sort of central bank we have.

[Jennifer]

Anne is right about saving and investment. We have no choice if we expect to live well as we age. I never worry about what the right time to save is, I just save and invest. When the stock market is weak as it is now, all the better for shares are less expensive. We all want sales on shoes, but sales on stocks make us wary. If America is expensive, buy Europe. If technology is too expensive, buy financials, and so on. We have no choice.

[dilbert dogbert]

Anne and Jennifer,
Good points about investing. Maybe that is why I stay in the market - other than inertia.

[tante aime]

Here's a kindergarten visualization twist for you.
Imagine production as a fire, and capital as water.

America used to built lumber rikes like crazy, every town had a huge bonfire, and the whole world used to come running to us with their water to put them out.

Then China caught fire. At first, we had to pause at the border, and negotiate the relative value of our cup of water before we could put a fire out. China's fires shot out of control. Then they pegged the value of water.

The bonfires grew massive in China, just as they began dying out in America. We weren't burning up the tracks anymore, just putting fires out in China.

Then China went off the water peg again.

The US cup of water was now only 2/3rds as large.

China couldn't find enough water to kill their bonfires.
Entire forests burned to the ground. Entire mountains slid into the sea. Americans were forced to start their own fires, but it takes a long time to start a fire with damp kindling and wet matches.

Making things worse, the Chinese had a whole bunch of T-bond options on our water that they dumped on us all at once. Now fires burned across all of China, but you could't give water away on our side of the pond, where US fires were irrevocably dead, cold and drowned.

Visual? Charred and smoldering forests, B&1/2 shivering mourners, torrential rain, howling sky, a real tsunami.
Now maybe you can grasp the New American Century, ney?

"Paul Wolfowitz was one of the most influential and consequential thinkers of his generation." D.Rumsfeld

God speed.

[Ari]

Tante Aime - I did try to understand what you have written, but I cannot. Simplicity in metaphor can work, but when we are obscure and complex we fail to have an impact.

[Ari]

About "saving and investing," I also agree with Anne and Jennifer. I can be more or less conservative but I have to think of years to come, and where my income will come from. Vanguard offers me investments for bull markets and bear markets. I can invest here or abroad. I can invest in general indexes or sectors. I can use the safest of bond funds, but always wind up beating inflation over time. There has never been a time when saving was not important, but the more insecure we feel the more important it should be. Interest rates are low, but long term bond funds have made Vanguard investors close to 10% a year since 2000 as a result.

[Ari]

Dilbert Dogbert makes a fair point. Just get into a habit of investing and don't worry about being bearish or bullish, just keep investing. I have been worried about the economy since the year began, so I complain about economic direction but I continue investing. I am even worried about the stock market, so I am buying value indexes, but I will not stop investing.

[Huffy]

Hey, "Dudes"

Mainly, there is too much saving around now. If China saves 40%, Japan 15% and Europe 10%, the US has to consume it all.

So if the US wants to save more, the others need to spend more, save less. Else, there won't be any demand left in the world.

Shure, some day someone will come up with a sensible "independent" source of demand, like bio-diversity "or something". Until then, the US has to overconsume.

Cheers, Huffy

[anne]

Imagine, being forced forced forced to consume by all the world's excess savers :) This must really be the doings of the French, must be. Must buy, must buy. Yes, the French.

[Movie Guy]

There were times while skiing in Austria and Switzerland that I felt "forced" to eat chocolate. The cold made me do it...

Ah, but what good chocolate it is.

And, of course, I was "forced" to drink excellent beer and wine during the evenings.

Back in America, it's Blue Bell ice cream. Yeah, I'm really "forced" to eat that fine ice cream. Can't be helped...

[James Whiting]

The money market is very efficent. Some people have extra money and are willing to lend it to others in return for interest payments. Other people need more money and agree to pay interest to borrow it. The amount borrowed and the amount lent are always equal (although money can be created by banks and others lending money that they have borrowed).

If interest rates drop, it removes the incentive for people to borrow money. Some people will choose to spend money rather than lending it. This decreases the amount of money available for borrowing. If interest rates increase, it will make some people decide to not spend instead of borrowing. This decreases the amount of money borrowed.

Interest rates are the only objective measure of whether a country is saving or borrowing too much. Relatively low interest rates suggest that a country is saving more, while relatively high interest rates mean a country is borrowing more. Claiming that savings rates are too low when interest rates are at historic lows (adjusted for inflation or not) requires explaining how the money market broke. The most significant change from the past is huge central bank lending.

While for any individual person, it always makes sense to save some money, when you look at a population as a whole, low interest rates will reduce savings rates. If this were not the case, monetary policy would have no effect. The whole rationale behind lowering interest rates to boost the economy is that people will reduce savings by spending more. Increasing interest rates fights inflation by increasing savings rates (and therefore reducing spending rates).

[Ian Welsh]

Actually, I can't make any sense of what Bernanke is saying at all. Developing countries should borrow more? What? That would help US current account deficits how? Seriously - not sarcastically, someone please explain this to me, because I don't see the connection - the US doesn't have money to lend, either private or public, to these countries.

[Ian Welsh]

Or perhaps he means that if money is going elsewhere, it won't go to the US? He's saying it's supply side - that the money has to go somewhere, so it's going to the US and if there's more demand for money, in natural competition, the US will get less and with the money they're borrowing from other people, developing countries will buy from the US, thus improving the US current account deficit? If that's what he's saying - well the US still isn't competitive on most things developing nations want - why would they spend that money on US goods?

So I still don't really get it, unless he's saying "if other people borrowed more we wouldn't be able to borrow as much because there wouldn't be money to borrow so we'd just have to get along without it."

Dunno.

[anne]

Ben Bernanke suggests there is a saving excess in countries such as Japan and China, and investors in these countries find American markets more attractive than domestic markets. So, saving is invested in America and in turn America uses the saving that comes in to buy abroad. Thus, a trade deficit but no problem for us.

[Ian Welsh]

That's simply not the case, unfortunately, since the dollar is being propped up by mass central bank buys - not the action of investors.

If that's what he's saying, he's full of it.

[anne]

That is what is being argued, and suddenly this is conventional wisdom, but I too increasingly find the argument suspect. We are not being forced to spend by savings being tossed at us from all directions :)