“Ben S. Bernanke, the chairman of the Federal Reserve, said on Monday that Asian nations were pulling the global economy out of its downturn but warned that both Asia and the United States needed to do more to reduce global trade imbalances.
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But Mr. Bernanke also warned that huge trade imbalances between the United States and the rest of the world had played a central role in the global economic crisis and that they could do so again.
“We were smug,” Mr. Bernanke said of the United States in a question-and-answer session, referring to the attitude of American policy makers toward the large inflows of cheap money from countries like China that were running huge trade surpluses. The flood of foreign money might not have been a major problem, he said, but the American financial regulatory system was “inadequate” in preventing a surge of reckless lending that aggravated the bubble in housing prices.
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“The United States must increase its national saving rate,” he said. “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.”
The federal deficit for the 2009 fiscal year soared to $1.4 trillion, almost triple the deficit in 2008, and budget analysts predict that budget deficits will average almost $1 trillion a year over the next decade.
By the same token, he said, Asian countries needed to rely less on exports and more on their consumption at home for their economic growth. One way to increase Asian household consumption, he said, would be for countries like China to increase their social safety net programs and reduce the uncertainty that currently hangs over many consumers.
Mr. Bernanke noted that global trade and financial imbalances had narrowed considerably since the crisis began, largely because the volume of international trade contracted by 20 percent from its peak before the crisis.
But he cautioned that the imbalances could widen again as economic growth revived.
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Mr. Bernanke avoided what was in many ways the elephant in the room: the value of the United States dollar. The dollar has dropped sharply in recent weeks against the euro and the Japanese yen, a move that has helped increase American exports by making them cheaper in some foreign markets. But the dollar has not budged in more than a year against China’s renminbi, which the Chinese continue to tightly manage and which many economists say remains greatly undervalued.”
Edmund L. Andrews, “Asia Said to Be Leading the Globe Out of Crisis”, The New York Times (19 October 2009).
http://www.nytimes.com/2009/10/20/business/economy/20fed.html?_r=1&adxnnl=1&adxnnlx=1256083284-zaXTsfBtZgmobeXy5w0siA
Edmund L. Andrews is a reporter for The New York Times. Ben Bernanke (1953-), former chair of the Department of Economics at Princeton University, is currently Chairman of the Federal Reserve Board.
Seen from the point of view of the world, the global financial crisis can be traced to three important factors: A global saving glut that financed the persistent and growing deficit in the U.S. current account, a low interest rate policy on the part of the Fed that encouraged American investment and discouraged American saving, and failures of markets and errors of policy that contributed to the severity of the crisis and the difficulty of restoring the foundations for rapid and widespread world growth.
These factors were at work for several decades and as a result of their influence outsized and unsustainable budget and trade surpluses and deficits arose in almost every country, especially the United States. Patterns of production, employment and consumption adjusted to the prevailing network of trade relationships, including the persistent imbalances, and large-scale financial flows from one country to another served as a means of financing the growing balance of payments disequilibria. In particular, the United States, with its strong propensity to consume, recorded large current account deficits reaching six per cent of its gross domestic product. In contrast, China and other countries, with their strong propensities to save, recorded large current account surpluses which were used to finance the U.S. deficits through an accumulation of U.S. liabilities to foreign central and commercial banks. These imbalances were a major contributing factor in the global financial crisis and have become so large policy makers at the national and international level recognize they are no longer sustainable and place the prosperity of the world in jeopardy.
In this talk, Dr. Bernanke points out that correcting the international imbalances will be very difficult. The U.S. must consume less and China must consume more, with similar adjustments in other countries. As Dr. Bernanke stresses, first and foremost, the U.S. must reduce the Federal deficit, which is now projected to exceed $1 trillion a year over the next decade. This estimate for the deficit, let me add, is probably understated and in the event of passage of a health care legislation, considerably understated. Reducing the deficit will represent a major challenge to American policy makers. Similar adjustments will have to be undertaken by Asian countries.
It must also be noted that the adjustment to be undertaken involves much more than balancing national budgets. What is required to establish a worldwide pattern of sustainable export and import trends that can serve as a basis for widespread prosperity among all countries. This is much more than a financial adjustment. It is an adjustment that affects all lines of production and every worker and household in the country. Productive resources must be reallocated sector by sector from present patterns of use to new ones as some countries expand their exports by increasing the range of products they sell on world markets and other countries shift their production toward their home markets. Employment levels and real incomes will be reduced, at least initially, as workers in some lines of production are transferred to other activities in a process of change fraught with the possibility of permanent loss of livelihood. Changes to exchange rates and terms of trade will affect every individual, already underway, will affect the pace of growth of the world economy, and it is likely to slow as the adjustment proceeds. For the U.S. and for China very large changes are needed to create patterns of production and consumption and exports and imports that are compatible with a rapidly growing world economy. For international agencies, a new set of arrangements must be instituted which will profoundly affect their work and the success of efforts to promote development in the least developed countries.
It took several decades for these huge global imbalances to arise and it will take several decades to remove them.
No one should underestimate the difficulty of the adjustment process that must be undertaken and its importance for the future of every person on this planet. Vibrant and rapidly growing world trade is essential for a peaceful and prosperous world. To achieve this goal requires difficult decisions that will raise tensions among countries at a time when tensions are already high.
One wonders whether policy makers understand the depth of the problems before their countries and their willingness to make the hard decisions necessary to promote and sustain the rapid pace of world development that has characterized the past half century.
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