Bernanke hints dollar standard is flawed | FT Alphaville

Bernanke hints dollar standard is flawed

Blink and you may have missed it.

But last Friday, Ben Bernanke probably made his most important speech since his ‘helicopter money‘ talk almost eight years ago.

According to author and economist Richard Duncan this is the first time the Federal Reserve chairman has publicly pointed out that the international monetary system may have a structural flaw. In the dollar standard.

As Duncan told FT Alphaville this weekend:

In it he conceded the Dollar Standard is flawed. He said, “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.”

With that statement, the Fed revealed it has been won over by the logic expressed in my book, The Dollar Crisis (John Wiley & Sons, updated 2005). The first two lines of that book state: “The principal flaw in the post-Bretton Woods international monetary system is its inability to prevent large-scale trade imbalances. The theme of The Dollar Crisis is that those imbalances have destabilized the global economy by creating a worldwide credit bubble.”

Never before has a senior US policymaker admitted that the Dollar Standard is flawed. Former Fed Chairman Greenspan wrote in his autobiography that the trade deficit was far down the list of things the United States needed to worry about. With this speech, the Fed abandoned that position.

According to Duncan — who largely predicted the subprime crisis in his 2005 published The Dollar Crisis — Bernanke may be alerting the world to the most important shift in US trade policy in more than a generation.

What’s more, since the flaw has now been declared, Duncan believes the world should expect the Fed or the US to do something about it relatively soon.

As Duncan expresses:

The world has been put on notice that the United States will take steps to correct this defect and the destabilizing trade imbalances it permits. If the flaw cannot be corrected through international coordination, then unilateral actions by the United States should be anticipated. These actions would likely include trade tariffs. Tariffs would have a devastating impact on the countries pursuing an export-led growth strategy, particularly China.

The United States last resorted to trade tariffs in 1971 when the Bretton Woods system collapsed. At that time President Nixon imposed a 10% “surcharge” on all imports.

Which essentially means: trade wars cometh.

To read the full text of Bernanke speech see here.

Related links:
“The US is not a viable concern anymore” – Duncan – FT Alphaville
Buyers, not savers, caused America’s deficit
– FT
Villains and victims of global capital flows
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Stop stealing our yield!
– FT Alphaville