A Major Statement (and Warning) on Global Capital Flows

I think this is a very good article.

Hilsenrath, Jon, DiLeo, Luca, 2011. Bernanke defends fed policies. The Wall Street Journal, Feb. 18.

Though at first glance, quantitative easing might appear to be devaluing the US Dollar I think that within the context of the global situation the policy has some merit.

I agree with Mr. Bernanke's comments, particularly:

"He said policy makers abroad have plenty of tools to fight inflation and asset bubbles themselves, including allowing their exchange rates to adjust higher to prevent overheating. Mr. Bernanke also said surging growth in developing economies, spurred in part by their own economic policies, were causing trouble for America."

Though the US is not in a technical state of "trade war" (tariffs hindering exports and imports between countries), I do think we are in the midst of a new form of economic war. The American public needs to understand the basics of this new type of warfare, to the point of being able to participate in the policy debate and the political process.

These comments from Mr. Brenanke are right on the mark:

"For China, there also appeared to be an indirect but ominous warning. The U.S. and France, he noted, helped to cause the Great Depression in the 1920s and 1930s by keeping their currencies undervalued for too long. The undervalued dollar and franc led to large capital inflows into these countries, in part from investors anticipating appreciation, and ultimately destabilized the world's financial system, noted Mr. Bernanke, a scholar of the Depression."

As I have written many times on this blog, the Chinese policy of pegging the Yuan is reckless and will have global economic consequences perhaps to the level of causing Great Depression II.

This is a powerful theme:

"Mr. Bernanke dedicated much of his comments to a theme he has been exploring since 2005—the large buildup of savings in the developing world and among oil-producing nations, which in turn led to a flood of capital into the U.S. before the financial crisis.

'The global financial crisis is receding, but capital flows are once again posing some notable challenges for international macroeconomic and financial stability,' he said, adding, 'the maintenance of undervalued currencies by some countries has contributed to a pattern of global spending that is unbalanced and unsustainable.'"

In the absence of all of G-20 adopting free float currency policies, QE2 is perhaps the only alternative.