Bernanke’s Asian defence is an implausible yarn

October 15, 2012

By Andy Mukherjee

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Ben Bernanke made a bold claim on his trip to Asia. In a speech delivered in Tokyo, the U.S. Federal Reserve chief said money-printing by advanced nations is not the “dominant” force behind surging capital flows to emerging economies, and that these countries are net beneficiaries from stronger demand from the West. If he’s right, Asian central bankers who grumble about the Fed’s quantitative easing should send Bernanke something nice this Thanksgiving.

Policymakers from Manila to Moscow understand why advanced nations, having already cut interest rates to near zero, are compelled to print money. But that doesn’t mean they like the capital flows heading their way. Raising interest rates to cool speculation and tame inflation only makes matters worse, because higher yields attract more short-term foreign cash.

However, Bernanke suggested emerging market authorities are suffering from an optical illusion. He said the connection between monetary policy in advanced economies and global capital flows “is looser than is sometimes asserted”. Shifts in investor sentiment over the last few years, often in response to the European crisis, may have had a big influence in determining movements of capital.

Investor attitudes are undoubtedly important. However, an International Monetary Fund study cited by Bernanke actually undermines his case: it shows that a one percentage point increase in real U.S. interest rates would reduce the probability of an emerging market surge by three percentage points. Bernanke’s advice to emerging market governments is to allow their currencies to appreciate. But it’s hard to see export-dependent nations – particularly Asian ones – agreeing to such a painful adjustment.

The Fed chairman is on stronger ground when he argues that the net impact on emerging economies of money-printing in advanced nations may be positive. A deep U.S. depression would mean global pain.

But this argument cannot be refuted, because it’s impossible to say what state the world would be in without quantitative easing. While U.S. GDP might be lower, so might oil prices, which are of deep concern to many emerging market policy makers. In his Tokyo address, Bernanke didn’t even acknowledge the possibility that money-printing may have pushed up the price of oil. It’s hard to see this speech doing much to win over Bernanke’s sceptical audience.

 

Comments

The system is rigged. Bankers, the middlemen of FED, are completely pessimistic about US domestic. They decided not to do anything and leave those struggling domestic businesses dying away themselves. Simply put, Bankers, the middlemen, are picking up those big oil and big auto attitudes, they don’t see alternatives are necessary. QE3 will become executive bonuses for not rebuilding or not recovering anything but for them to penetrate Asians corporations to spread industrial banking capitalist predator monopoly. If Asians don’t resist this, their economy bases will be infected and rigged against those highly capitalized assets now in Asia. Productivity based credits will start crunching if they don’t defense their productivity based credit system.

Posted by beancube2101 | Report as abusive
 

All this talk by the author of raising interest rates as good economic policy for the underdeveloped countries in times of crisis is simply innaccurate and and well behind current economic thinking.

In 1997, at the onset of the Asian Crisis, Mahadir Mohamed — then Prime Minister of Malaysia — completely ignored the IMF’s stern insistence on Malaysia raising its interest rates. Instead, he introduced currency controls to stop the inevitable rapid inflow of harmful hot dollars into his own country. Worked like a treat — Malaysia was the first Asian country country to zoom out of the Asian Crisis on turbo. But the big American funds and banks were furious at their lost opportunity to economically plunder that country.

Since that time, it has to be said, the IMF has indeed commended using currency controls as a brake on rampant hot dollars rushing in to buy and usurp the eminent domain and resources of these underdeveloped countries. This is also standard practice now — more and more developing nations have sensibly started using government currency controls for their own necessary economic protection.

By raising interest rates, the American Fed and the big US banks have the unfair market advantage, but by using currency controls the local government has full control over its own currency’s protection and destiny, which thereby becomes successfully insulated against any dangerous and uncontrollable hot money inflows such as US dollars.

Posted by slowsmile | Report as abusive
 

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