Bernanke Says Global Imbalances Bedevil the World Economy. Discuss.

The global economy won't work as Americans wish due to the specific necessity for each country. Europe, China or Japan has its own problem of growth as our economy does. We have to do something in order to regain the economic growth. The easiest way is the fiscal stimulus by the government, borrowing at historically low rates. However, this is politically impossible under the Republican majority Congress that still cherish defunct economic theories, if they have. The best for the country is to give macro economic examinations to the congressional candidates so that only qualified politicians can run for the public office. Every professionals in the legal, brokerage, insurance or medical area, you name it, are required to pass examinations to be qualified as such. Senators and Congressmen need to pass the macro economic examination because their major jobs are to make fiscal policy.

Another issue that Bernanke and other economists have raised concerns fixed capital formation as a spur to employment. The concern about replacing workers with machines goes back to the Luddites. The concern about job loss has usually been unfounded as other jobs, often better, have arisen to replace them. But the rapid increase of digital automation over the past 30 years seems to have greatly accelerated the process of job replacement in factories, mines, and construction without a corresponding rise in well paying jobs for people with similar education and skills. Capital investment seems to have a perverse effect on employment. The increase in educational attainment has offset this somewhat for new entrants into the workforce but for working age people a lack of continuing education and upskilling becomes a drag on the economy.

Bernanke's "savings glut" explains a lot about income inequality and its consequences. Rich individuals, banks, and corporations (Apple, Facebook, etc.) as well as nations have created a savings glut in part because they have few places to productively invest. Add to this countries with huge trade surpluses from manufacturing (China) and natural resources (primarily oil from the likes of Saudi Arabia and Nigeria) have created a small but immensely rich moneyed class who can't spend all they take.
The stagnation of real wages and transfer payments for the great majority of people in rich countries and lack of income growth for all but the richest in the kleptocracies has left demand stagnant. Thus there is not only a savings glut but a corresponding demand drought.

The picture will become a lot clearer when economists finally will start to differentiate between 'producing' and 'consuming' countries.

BE-cause if you have a mainly consuming economy like the US with too many low paying jobs of a monsterous service industry and on the other side too few high paying jobs of a dominant Financial Sector - there is no way you can fix that structurak problem with financial tricks.

You got to change or - let's call it 'reform' - perjaps by bringing manufacturing back or adjusting your consumption to a sustainable level of production?

Robert Reich, Nicholas Shaxson, Thomas Piketty, and others have described in some detail the underground cash flow economy of the rich and filthy rich. Make it transparent! But, first re-create an economy based not on raw materialism and consumer-ism but scientific growth. Before using the stick, which no doubt some will require, use the carrot. Right now, nationalism is inter-twined with capitalism to make a poisonous mixture. We need scientific growth in areas that benefit all in the world community: medicine, energy, agriculture, technology. Unless we has a species can find a way around nationalistic capitalism and corporate capitalism we are doomed.

The writer Josh Barro asks a good practical question at the end.

" 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?"

The short and sweet answer is NOT MUCH though. Brazil since 2009 is a good case study. The FED ultra loose monetary policy has flooded global financial markets with trillions of cheap dollars. Brazil has benefit greatly as well as all emerging economies.

From 2010-14 Brazil's central banks accumulated dollar denominated reserves to levels unseen before. That in turn, gave rise to a rapid expansion of money supply accompanied by lower interest rates which fuelled a private consumption spree, particularly from American produced goods and services, and heavy government spending in social programs.

By the end of 2014 the economy presented major macroeconomic imbalances. Negligible growth, unhinged inflation, unsustainable private/public debt and worrisome balance of payments deficits, including trade. A typical stagflation situation.

Fiscal austerity is back with President Dilma Rousseff's reelection in 2015. Budget cuts and tax increases are now being debated. If the fiscal adjustment program goes according to plan, perhaps the economy will get back to growth in three years.

One thing for sure. domestic consumption leveraged by heavy dollar borrowing will never happen again. The party is over for good.

Excellent post. Ben Benanke, the man who saved the world, now has a blog with unrestrained freedom to comment on the US and world economy. We should all read it.

I guess pumping all that free money into Wall Street didn't do the trick.

Dean Baker responds. http://www.cepr.net/index.php/blogs/beat-the-press/ben-bernanke-and-the-...

Also, perhaps Josh should as Professor Summers and Mr. Rubin, since they "saved the world in 1997" by creating austerity in Asia while boosting an over strong dollar, the policy decisions that haunt us to this moment (Secretary Jack Lew, continues to their "strong dollar policy" to this day. See http://www.reuters.com/article/2015/03/20/usa-currency-jacklew-idUSW1N0V...

Let's be clear on a few things: Yes, the chinese and japanese are prolific savers, and yes, they run huge surplus. But the huge chinese savings did *not* cause our housing bubble or financial crisis in 2008. Those were our own doings, and thanks to the Greenspan's Fed, interest rate was left at near-zero for far, far too long, and the Fed was instrumental in dismantling regulations like Glass-Steagall Act and resist calls to improve transparency in the derivatives markets, resulting in the wild wild west in the financial markets in which anything that had a pulse could get a loan, and nobody had any idea the who's owing how much to whom in the OTC markets.

As to writer's last questions of:

"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?"

It's almost laughable that NYT would even print this. The problem is not about emerging market not borrowing from us (again). The problem is all about we borrowing too much from them (since we're issuing debts in the form of Treasury debts like candies) and buying too much, still. While there's much apocalyptic talks from GOP about USD collapse due to foreigners not wanting our debts, that won't happen any time soon unless and until there's other alternatives which isn't happening. So, US will continue to be buyers of last resort, and the chinese would continue to lend, manufacture, and save.

Pure genius.

How about reducing interest rates on deposits at the FED to negative levels, while continuing to tighten financial regulations to control risky lending and asset bubbles? This should depreciate the dollar and reduce the trade deficit.

Banks would oppose it, but that is not a reason not to do it.

A simply approach to predicting future growth, which does away with the need for grand narratives about trade imbalances etc., is simply to state that the global rate of growth will return to it historical average - i.e. regression to the mean. The historical average growth over human history has been lower than it has in the past 60 or so years.

It seems unfortunate to me that so many articles about economic growth do not mention the long term average growth over recorded human history, thereby setting the expectation that the relatively high growth over the last 60 years is the norm, when most people alive today have had the good fortune of living through a relatively high-growth era in human history.

Also bizarrely missing from articles about growth and GDP is the cost of that growth in terms of environmental damage, depletion of resources etc... It would be insane for a business to measure its performance purely by the volume and value of the goods it produces without measuring the cost, yet this is what we do when talking purely about growth and GDP without discussing the costs of that growth.

Dean Baker agrees with Ben Bernanke that our trade deficit is the problem, but explains the problem with both Ben Bernanke calling trade pacts not the place to handle complicated issues like currency manipulation (the chapter on intellectual property, for example, is much more complicated, and also with Josh Barrow concluding that asking nicely, outside of trade pacts, countries to stop currency manipulation is ineffective.
http://www.cepr.net/index.php/blogs/beat-the-press/ben-bernanke-and-the-...

The real problem is not, Dean Baker says, whether:
"Bernanke is right, we don't have to address currency imbalances in the TPP. The [real] problem is that there is no reason to think the Obama administration has any intention of addressing them anywhere else either".

"...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."

We will never return to normal. There is no going back to plain old normal after the Financial Service Industry has partaken of the formerly forbidden fruits of a wondrous 'new normal' accounting alchemy and the equally wondrous 'new normal' government-guaranteed derivative gambling action.

It's a brave new 'normal' world from here on out...

Please wake up Mr. Bernanke, you remain in complete denial. We are living in an "Upside Down World" where the Emerging Markets have become net creditors with their ability to influence and lead debate on global finance. Have you heard of the AIIB by any chance? The rest of the world has had it with our attitude, with the IMF and with our arrogance. Do you wish to tell me that the global economy is unhealthy because capital is flowing the other direction. You are completely delusional. How about you take a harder look at the previous thirty years and the lack of cohesive foreign economic policy. That's what happens when individual interest is placed above national interest.

"...which would aim to prevent countries from deliberately weakening their currencies in order to gain an advantage in exporting."

You mean, like the U.S. has done until 6 months ago?

The current crisis among Russian and Brazilian businesses that borrowed US dollars and are having to pay them back in deflated currencies is going to put a damper on borrowing US dollars for a long long time. This latest crisis can be added to the Asian currency crisis in the late '90's as strong evidence for foreign governments and businesses, borrowing abroad is high risk, not worth the higher short term growth rates when vicious circles lurk around the corner.

Bernanke argues that the housing bubble did not result in an overheated economy because 6% of domestic demand was being diverted to purchase foreign goods. But this is moot for two reasons. First, what matters for GDP growth is not the level of the trade deficit but its rate of change. A trade deficit, even a large one, that stays constant has no effect on the growth rate of GDP. Net exports, which is what counts for GDP calculations, fell steadily starting in 1997 and reached a peak in 2006 near 6% of GDP then suddenly reversed. The increasing trade deficit was indeed a drag on growth but was it was also a drag during the big late 1990s boom.

http://research.stlouisfed.org/fred2/graph/fredgraph.png?g=16j0

Secondly, if we look at total domestic demand we can clearly see a declining growth rate that continued even during the housing bubble! Real final sales to domestic purchasers includes all spending whether on imports or US made goods and services.

http://research.stlouisfed.org/fred2/graph/fredgraph.png?g=16iH

The chart above shows that demand grew at a whopping 6.3% clip back in 1998 but during the housing bubble it maxed out at only 4.7% in 2004. It then fell steadily even as the housing bubble was peaking. In fact, in the bubble peak year of 2006 growth in domestic demand had already fallen below 3% and continued to fall well before the financial crisis of 2008. The US trade deficit is a red herring that does not explain the stagnation in US domestic demand.

Mr. Barro asks: "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?"

How about:

(a) A "bankruptcy" regime that provides more certainty for lenders (including certainty of circumstances when they will not be repaid) and clear work-out provisions and protections for borrowers when lending and borrowing overshoot.

(b) Currency integration institutions that get people off the knife-edge where they are risking large, very rapid capital losses when the switching point between the multiple equilibria of currency markets is crossed.

"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." This is convenient explanation that lets the Fed off the hook, but it is an incorrect one. The housing bubble was well underway in 2004 when the Fed FINALLY began raising rates after keeping them at 1% or below for over a year due to an absurd fixation on deflation during at time of rapidly escalating asset prices. More importantly even after 2004 the Fed did nothing to curtail the growth of exotic mortgages which were much more important in fueling the housing boom than the level of nominal interest rates. The expansion of credit was and is much more important than the level interest rates. The Fed did and still does not understand this.

Bernanke missed the housing bubble as it was staring at him in the face and now has the temerity to lecture us on its causes. I know he needs to keep his name out there to keep cashing in on his $250,000 speeches to the financial interests he bailed out, but I wish the man would show just a smidgen of humility and remorse.

The Big"ger" picture got a little clearer today with an agreement to agree in Switzerland. Bringing Iran and its peoples back into the world community will be a huge feather in OB's hat. The moons all line up on Good Friday.

I'm so tired of reading economics journalism that frames growth as good and the lack of growth as bad. Economic growth is economic acceleration, as GDP is a rate. Must we really speed up the economy every year forever to achieve material well-being, or is this goal just a distraction meant to trick the lower classes into thinking they can get a bigger slice of a bigger pie instead of needing to divide it up more equally? Increasing the rate at which we turn the earth into stuff isn't a good idea, especially in the age of climate change.

Ask nicely? Perhaps it is time to ponder a new way to organize our planet. Nation States defined by geographical boundaries are becoming less powerful every decade with diminishing influence in advancing the interests of their population. And I am not shedding tears, though I am concerned what replaces them.

One concept, two hyphenated words + 1 non-hyphenated word: Debt-restructuring programs.

The common conception is that debt was a major problem that contributed to the Global Financial Crisis. In 2007, global debt as a share of GDP: 269%; in 2014: 286%

We need to deleverage either through GDP growth or debt-restructuring. The former is not looking very promising.

http://www.mckinsey.com/insights/economic_studies/debt_and_not_much_dele...

Or perhaps the markets aren't interested in buying what the Americans are exporting. Let's see:

- junk food / fast food that damages health and economic productivity
- expensive pharmaceuticals that supposedly counteract this same damage
- agricultural supplies that degrade ecosystems, destroy biodiversity and reinforce dependency
- cars that pollute, clog transportation networks and promote unhealthy, sedentary lifestyles
- IT systems that violate the fundamental human right to privacy
- weapons systems that destabilize communities and pour fuel on conflagrations

The American economy is the greatest existential threat facing the planetary ecosystem in terms of per capita greenhouse gas emissions, unsustainable levels of resource consumption and ecosystem degradation.

Why would any sane person what to increase it?

"Mr. Bernanke says a “global savings glut,” caused by people and governments overseas saving too much... not buying enough American exports."

Absolutely, and the good news is that the US just happens to have invented the solution, a potent combination of marketing and consumer credit.

When Big Tobacco had their backs to the wall with declining smoking rates in the developed countries, did they whine about not enough smoking? No sirree, they got 9 year old boys in Asia hooked on cigarettes through clever marketing.

All we have to do is put our best minds in payday lending and "I gotta have it" marketing together and get busy. Give some tricked out F-150 pickups to Asian celebrities to drive to their events. Offer 10 year payment terms, 100 gallons of free gas and some suggestive ads featuring young Chinese men attracting the rare young women for marriage.

With new constraints promised on US payday lending, the rest of the world should reflect on their experience with Big Tobacco and be selective in promoting consumerism.

Too many owners of capital are more interested in speculation in financial assets than in investing in productive capital, here or overseas. Any why not: speculation has much higher (potential) returns. But are the returns higher if risk is taken into account? What's the risk if the Fed will always intervene and prevent the value of financial assets from falling. Faced with a choice between uncertain returns (not to mention political risks) from investing in productive capital overseas and investing in speculative but secure (politically) and protected (by the Fed) financial assets here, is there really a choice?

My reading of the article suggests that in the past we treated developing countries roughly when they made unwise borrowing decisions because some of us wanted everything we could get. The article suggests that these countries learned that they would suffer at our hands if they made a mistake. And the article states because of past events, other countries are doing what our top 1% does - spend less they they receive. All of this suggests that the countries that are saving more than they spend have no reason to do what is good for our economy and bad for them. This is gong to be interesting.

I noticed that these details are field-level dynamics of current style capitalism. principally, it's no wonder there's so many problems; we indulge capitalism for too long and too much. fundamentally, combining capitalism and socialism-style economy should balance things out.

"What can we do to make developing countries unafraid to borrow from us (developed economies) again..." Sounds like a perfect job for the IMF

Secular stagnation seems to be the catch phrase offered for the failure of full employment to materialize years earlier. Foreign countries are not buying sufficient U.S. products and domestic consumer spending is sluggish to the point where ample savings is not being reinvested in production. Foreign profits have not been repatriated because taxes are high and borrowing costs are so low. Why in the world does anyone produce when the tax code and the Fed encourage profit with little risk and few jobs? Some do. Mr. Buffett appreciates his stock by several billion a year and it will never be taxed under the current code. He does not need savings or more tax incentives.

The larger problem is congressional stagnation on tax reform. Near full employment could be achieved via consumer demand by replacing the payroll taxes with a 4% VAT and elimination of unnecessary business tax expenditures. Guaranteed transitional jobs to all would simply require limiting the charitable tax deduction to charities that agree to expand services and provide jobs at a little below private sector rates.

The problem of excess savings can be solved with an optional wealth tax that lets taxpayers choose between a flat 26% income tax rate (allowing deductions only for charity) or an 8% income tax rate combined with a 2% net wealth tax (excluding gift, estate and capital gains taxes; and tax exempt retirement savings). C corporations should pay the same 8% income tax rate and repatriate foreign profits.