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Rebalancing the Global Recovery | Bernanke

A particularly hard hitting description of what the US sees as the problem in the world economy, i.e. China’s accumulation of US denominated investments thus keeping the US dollar strong and the Yuan weak.  While it is framed as a global recovery issue, it strikes my untrained eye as a US centric problem.  Long read but interesting if you are curious about the intricacies of the current headlines.

Ben Bernanke – Rebalancing the Global Recovery

Chairman Ben S. Bernanke

At the Sixth European Central Bank Central Banking Conference, Frankfurt, Germany
November 19, 2010

Rebalancing the Global Recovery

The global economy is now well into its second year of recovery from the deep recession triggered by the most devastating financial crisis since the Great Depression. In the most intense phase of the crisis, as a financial conflagration threatened to engulf the global economy, policymakers in both advanced and emerging market economies found themselves confronting common challenges. Amid this shared sense of urgency, national policy responses were forceful, timely, and mutually reinforcing. This policy collaboration was essential in averting a much deeper global economic contraction and providing a foundation for renewed stability and growth.

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. This problem is not new. For example, in the somewhat different context of the gold standard in the period prior to the Great Depression, the United States and France ran large current account surpluses, accompanied by large inflows of gold. However, in defiance of the so-called rules of the game of the international gold standard, neither country allowed the higher gold reserves to feed through to their domestic money supplies and price levels, with the result that the real exchange rate in each country remained persistently undervalued. These policies created deflationary pressures in deficit countries that were losing gold, which helped bring on the Great Depression.3 The gold standard was meant to ensure economic and financial stability, but failures of international coordination undermined these very goals. Although the parallels are certainly far from perfect, and I am certainly not predicting a new Depression, some of the lessons from that grim period are applicable today.4 In particular, for large, systemically important countries with persistent current account surpluses, the pursuit of export-led growth cannot ultimately succeed if the implications of that strategy for global growth and stability are not taken into account.

Written by Colin Henderson

November 18, 2010 at 22:36

Posted in Uncategorized

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