Saturday, March 3, 2007

Bernanke at Stanford

Ben Bernanke was at Stanford yesterday, and Jim Christie was there to cover his speech for Reuters. In contrast to the Financial Times report by Krishna Guha that I examined on Wednesday, Christie has made it clear when he is giving us Bernanke's words, even if that still leaves us with the problem of trying to figure out what message is actually being sent. The message appears to be primarily to drum up confidence in the Federal Reserve, since the basic theme involved the regulation of economic health through regulatory control. The reason for sending this message goes back to one of the questions I raised in my Wednesday post over who, in this brave new world of globalization, is calling the rules for the Great Economic Game. Thus, Bernanke wanted to assure us all that globalization in not wreaking havoc with our own playbook:

When the offsetting effects of globalization on the prices of manufactured imports and on energy and commodity prices are considered together, there seems to be little basis for concluding that globalization overall has significantly reduced inflation in the United States in recent years; indeed the opposite may be true.

This led to the major punch line as Christie reported it:

Bernanke said that globalization has not "materially affected the ability" of the Fed to influence U.S. financial conditions, "nor has it led to significant changes in the process which determines the U.S. inflation rate."

So, is this another dog that did not bark in the night; or is there are growing storm of opposition opinion claiming that the Federal Reserve no longer has the regulatory power on which we have relied for so long? Put in a more fear-mongering way, if, as many such as Andreas Lorenz and Wieland Wagner have argued, China is now calling the rules for the Great Economic Game, does that mean that they are now controlling the economic destiny of the United States? If the question is framed in that kind of language, one can understand why Bernanke needs to maintain, if not enhance, confidence in the Federal Reserve. However, if we are really interested in worst-case scenarios, the framing of that question is actually a distraction from the harder truth concerning the magnitude of American debt that China now owns. The unpleasant truth is that our economic destiny depends less on globalization and more on how China decides to manage that debt. Given the track record of our inability to grasp the world view of any culture other than our own, one can imagine any number of ways in which the United States might blunder into an unpleasant situation that could provoke China into being less accommodating towards that debt we have amassed!

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