Ben Bernanke and Larry Summers are in the midst of a vigorous blog debate about why the world’s economy is so messed up and how it can be fixed.
Mr. Bernanke says a “global savings glut,” caused by people and governments overseas saving too much, has driven unemployment up in the United States, and driven wages, G.D.P. and interest rates down.
The mechanisms are complicated, but one of the main reasons imbalances matter is that any country that’s saving too much is not buying enough American exports. This is a cheerier story than Mr. Summers’s “secular stagnation.”
Because if we fix the imbalances — get other countries to stop saving so much and start buying more of our products and borrowing more of our money — the American economy should more or less return to normal.
But is there a good way for American policy makers to fix imbalances that arise abroad?
“We don’t really have powerful tools,” Mr. Bernanke said Monday in response to a question from The New York Times.
He rejected one idea floated by some left-of-center economists like Dean Baker: demanding the inclusion of anti-currency manipulation provisions in trade agreements like the Trans-Pacific Partnership, which would aim to prevent countries from deliberately weakening their currencies in order to gain an advantage in exporting.
Mr. Bernanke offers plausible reasons for rejecting this approach. Other countries would be unlikely to agree to such provisions. It’s not clear you could develop treaty rules that effectively distinguish between currency manipulation and valid monetary policy activity.
Most important, some currency-weakening policies are actually good for the global economy, especially if the country with the weakening currency has a weak economy (think Abenomics in Japan). An international regimen that cracks down on weak-currency policies could therefore, in some cases, make global imbalances worse.
But if not currency provisions in trade agreements, then what? “Obviously, there’s not a real legal stick to use,” he said, “but countries do respond I think to diplomatic overtures and to pressure from their trading partners when what they’re doing is perceived as, you know, counterproductive to the global economy.”
That is, ask nicely. The best example of the Ask Nicely strategy is China, whose weak currency policy was one of the leading sources of global trade imbalance over the last 20 years. In recent years, the Chinese have allowed their currency to appreciate.
Perhaps they did this because of pressure from America and other trade partners; perhaps because the weak renminbi, great though it was for Chinese manufacturers, was suppressing Chinese domestic consumption and reducing real income for the country’s citizens.
Either way, China’s policy persisted for an awfully long time and caused significant problems in the American economy. China exchanged products for American dollars. Instead of buying American products with those piles of dollars, it plowed a lot of them into American securities, including Treasury bonds.
Strong foreign demand for American debt led to the strange situation from 2004 through 2007 when the Federal Reserve raised short-term interest rates but could not get long rates to move; this kept mortgage rates low and helped fuel the housing bubble.
The American trade deficit exceeded 6 percent of G.D.P. by 2006; the United States was able to maintain a decent labor market despite the trade deficit and expensive oil only because of the housing bubble.
Then, the housing bubble burst. All of which is to say, it would have been nice if the Chinese had acted sooner. Today’s main sources of imbalance don’t offer much hope for the Ask Nicely strategy. The other emerging Asian economies have continued to grow their trade surpluses even as China’s shrinks.
Their actions are understandable: The currency crises of the 1990s caused a lot of economic pain in places like South Korea, and they have since sought to accumulate enormous amounts of foreign reserves so they never have to be at the mercy of the International Monetary Fund again.
But that requires spending a lot of their excess income on American bonds instead of American products. The other new source of economic imbalance is Europe.
If European countries still had their own currencies, Germany would have a Deutschmark that is stronger than today’s euro, and places like Spain and Italy would have weak currencies. In the real world, Germany’s too-weak currency has led it to run a huge trade surplus.
Southern Europe’s too-strong currency should lead it to run a trade deficit, but it can’t because it’s in a horrible, semipermanent depression, which forces its residents to save instead of buying. When you combine those effects, you find the eurozone as a whole is now running a big trade surplus; the question is how long that will persist.
“When the European periphery returns to growth, which presumably will happen at some point, the collective surplus ought to decline,” Mr. Bernanke wrote Wednesday on his blog. If we need to wait for southern Europe to get its act together for the global economy to get back into balance, we may be waiting for a very, very long time.
Perhaps, in addition to looking for sticks like trade pact provisions, and instead of hoping we can talk Europe into not being a basket case anymore, policy makers could be looking for carrots.
Maybe the road to global rebalancing doesn’t run through China or Europe but through countries that got burned in the 1990s currency crises, many of which have been motivated to run large current account surpluses and avoid borrowing.
The global situation today, in which developing countries are net savers and rich countries are net borrowers, is backward. Rich countries have lots of money, and developing countries have lots of investment opportunities. In a healthy global economy, capital should be flowing from the former to the latter, as it did before the mid-1990s.
Perhaps the question we ought to be asking: What can we do to make developing countries unafraid to borrow from us again, so American exports can find markets and American capital can find better investment opportunities abroad?
nytimes.com
Mr. Bernanke says a “global savings glut,” caused by people and governments overseas saving too much, has driven unemployment up in the United States, and driven wages, G.D.P. and interest rates down.
The mechanisms are complicated, but one of the main reasons imbalances matter is that any country that’s saving too much is not buying enough American exports. This is a cheerier story than Mr. Summers’s “secular stagnation.”
Because if we fix the imbalances — get other countries to stop saving so much and start buying more of our products and borrowing more of our money — the American economy should more or less return to normal.
But is there a good way for American policy makers to fix imbalances that arise abroad?
“We don’t really have powerful tools,” Mr. Bernanke said Monday in response to a question from The New York Times.
He rejected one idea floated by some left-of-center economists like Dean Baker: demanding the inclusion of anti-currency manipulation provisions in trade agreements like the Trans-Pacific Partnership, which would aim to prevent countries from deliberately weakening their currencies in order to gain an advantage in exporting.
Mr. Bernanke offers plausible reasons for rejecting this approach. Other countries would be unlikely to agree to such provisions. It’s not clear you could develop treaty rules that effectively distinguish between currency manipulation and valid monetary policy activity.
Most important, some currency-weakening policies are actually good for the global economy, especially if the country with the weakening currency has a weak economy (think Abenomics in Japan). An international regimen that cracks down on weak-currency policies could therefore, in some cases, make global imbalances worse.
But if not currency provisions in trade agreements, then what? “Obviously, there’s not a real legal stick to use,” he said, “but countries do respond I think to diplomatic overtures and to pressure from their trading partners when what they’re doing is perceived as, you know, counterproductive to the global economy.”
That is, ask nicely. The best example of the Ask Nicely strategy is China, whose weak currency policy was one of the leading sources of global trade imbalance over the last 20 years. In recent years, the Chinese have allowed their currency to appreciate.
Perhaps they did this because of pressure from America and other trade partners; perhaps because the weak renminbi, great though it was for Chinese manufacturers, was suppressing Chinese domestic consumption and reducing real income for the country’s citizens.
Either way, China’s policy persisted for an awfully long time and caused significant problems in the American economy. China exchanged products for American dollars. Instead of buying American products with those piles of dollars, it plowed a lot of them into American securities, including Treasury bonds.
Strong foreign demand for American debt led to the strange situation from 2004 through 2007 when the Federal Reserve raised short-term interest rates but could not get long rates to move; this kept mortgage rates low and helped fuel the housing bubble.
The American trade deficit exceeded 6 percent of G.D.P. by 2006; the United States was able to maintain a decent labor market despite the trade deficit and expensive oil only because of the housing bubble.
Then, the housing bubble burst. All of which is to say, it would have been nice if the Chinese had acted sooner. Today’s main sources of imbalance don’t offer much hope for the Ask Nicely strategy. The other emerging Asian economies have continued to grow their trade surpluses even as China’s shrinks.
Their actions are understandable: The currency crises of the 1990s caused a lot of economic pain in places like South Korea, and they have since sought to accumulate enormous amounts of foreign reserves so they never have to be at the mercy of the International Monetary Fund again.
But that requires spending a lot of their excess income on American bonds instead of American products. The other new source of economic imbalance is Europe.
If European countries still had their own currencies, Germany would have a Deutschmark that is stronger than today’s euro, and places like Spain and Italy would have weak currencies. In the real world, Germany’s too-weak currency has led it to run a huge trade surplus.
Southern Europe’s too-strong currency should lead it to run a trade deficit, but it can’t because it’s in a horrible, semipermanent depression, which forces its residents to save instead of buying. When you combine those effects, you find the eurozone as a whole is now running a big trade surplus; the question is how long that will persist.
“When the European periphery returns to growth, which presumably will happen at some point, the collective surplus ought to decline,” Mr. Bernanke wrote Wednesday on his blog. If we need to wait for southern Europe to get its act together for the global economy to get back into balance, we may be waiting for a very, very long time.
Perhaps, in addition to looking for sticks like trade pact provisions, and instead of hoping we can talk Europe into not being a basket case anymore, policy makers could be looking for carrots.
Maybe the road to global rebalancing doesn’t run through China or Europe but through countries that got burned in the 1990s currency crises, many of which have been motivated to run large current account surpluses and avoid borrowing.
The global situation today, in which developing countries are net savers and rich countries are net borrowers, is backward. Rich countries have lots of money, and developing countries have lots of investment opportunities. In a healthy global economy, capital should be flowing from the former to the latter, as it did before the mid-1990s.
Perhaps the question we ought to be asking: What can we do to make developing countries unafraid to borrow from us again, so American exports can find markets and American capital can find better investment opportunities abroad?
nytimes.com
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