The wheels of diplomacy were nicely oiled on Ben Bernanke’s trolley at the US-Asian economic gabfest hosted by the San Francisco Fed in Santa Barbara on Monday.
In a carefully-crafted rundown on Asia and the global financial crisis, Bernanke hailed Asia as an engine of global growth and avoided the tough rhetoric that emanated earlier this month from the US Treasury, which barely stopped short in its semi-annual report on exchange rate policies of branding China a `currency manipulator’ but said Beijing’s moves to accumulate more forex reserves risked “unwinding some of the progress made in reducing imbalances”.
This week, Bernanke’s message was embedded in his `we’re all in this together’ approach. But the Fed chairman still made his point clear, and it was the same point made by successive US administrations over decades: Asia should rely less on exports and focus more on building up domestic consumption.
He also reiterated the Washington mantra on exchange rate policies, warning that Asia risked seeing asset bubbles fuelled by capital inflows and urging “greater exchange rate flexibility” offset by fiscal consolidation.
As the FT reported, the Fed chairman said it was “extraordinarily urgent” that the US and Asia adopt policies that prevent a revival of global economic imbalances which had helped cause the crisis.
We wish him luck. Here’s a taste of Bernanke’s conclusions:
The United States must increase its national saving rate. Although we should deploy, as best we can, tools to increase private saving, the most effective way to accomplish this goal is by establishing a sustainable fiscal trajectory, anchored by a clear commitment to substantially reduce federal deficits over time.
For their part, to achieve balanced and sustainable growth, the authorities in surplus countries, including most Asian economies, must act to narrow the gap between saving and investment and to raise domestic demand. In large part, such actions should focus on boosting consumption.
Admittedly, just as increasing private saving in the United States is challenging, promoting consumption in a high-saving country is not necessarily straightforward. One potentially effective strategy is to reduce households’ precautionary motive for saving by strengthening pension systems and increasing government spending on health care and education. Of course, such measures are likely to improve welfare and productivity as well as to contribute to more balanced, robust, and sustainable economic growth.
You can read the rest here.
As SeekingAlpha’s Steve Blitz notes: Bernanke’s call for balanced growth policies in Asia has been made before — not only by Bernanke but by US Treasury secretary Tim Geithner, economic adviser Larry Summers and others. But the call appears to be falling on deaf ears as far as Asian exporters are concerned, he adds, citing this Bloomberg report: “Won crushes yen as dollar substitute in Asian rally”.
We’d have to agree with Blitz’s conclusion:
Looking at the article and the speech, it is hard to see how the Fed Chairman’s optimism is resting on anything more than a wing and a prayer.
US policy, he adds, is in “a legitimately tough spot” as it balances a still problematic banking system and huge excess capacity with the possibility of inflation imported through rising oil and commodity prices. He continues:
The possibility of higher commodity prices is more probable as Asian nations sustain overly expansionary policies by keeping their currencies cheap to the dollar in the face of large and growing trade surpluses. Of course most of these Asian countries act as they do because of fear of a repeat of the 1990s when strong global demand for their currencies recklessly swamped their capital markets and distorted prices. As demand waned, we got the Asia currency crisis of 1997.
As for importing inflation, worrying about inflation today is like sitting in a freezing cold apartment in the dead of winter wearing several coats and sweaters and only worrying about the bathing suit you need to buy if you can afford to take a summer beach vacation. Commodities are still cheap and US interest rates will stay lower longer than the market expects.
Related links:
Beware EM asset market & credit boom bubbles & busts – Willem Buiter’s Maverecon
Bernanke on Asia and imbalances – Money Supply