Bernanke Translated

* November 18, 2010, 9:01 PM
From Wall Street Journal

By David Wessel

In remarks prepared for delivery in Frankfurt Friday morning, and released by the Federal Reserve Thursday night in Washington, Fed Chairman Ben Bernanke mounted his most detailed defense against charges that the Fed is deliberately cheapening the dollar by printing $600 billion to buy U.S. Treasurys and tried to point the finger at China’s reluctance to let its currency rise faster. Mr. Bernanke spoke in the language of a Princeton University economist, which he used to be, and avoided quotable phrases like Alan Greenspan’s 1996 warning of “irrational exuberance” or Brazilian finance minister Guido Mantega’s more recent talk of a “currency war.”

Here are excerpts from Mr. Bernanke’s remarks, with translation by David Wessel, economics editor of The Wall Street Journal and author of “In Fed We Trust: Ben Bernanke’s War on the Great Panic.”

ON THE ‘TWO SPEED’ RECOVERY

Reuters
Fed Chairman Ben Bernanke

“Tensions among nations over economic policies have emerged and intensified, potentially threatening our ability to find global solutions to global problems… International policy cooperation is especially difficult now because of the two-speed nature of the economy… Economic growth in emerging markets has far outstripped growth in the advanced economies.”
“The level of output in the advanced economies is currently about 8% below its long-term trend, whereas economic activity in the emerging markets is only about 1.5% below the corresponding (but much steeper) trend line for that group of countries. Indeed, for some emerging markets the crisis appears to have left little lasting imprint on growth. Notably, since the beginning of 2005, real output has risen more than 70% in China and about 55% in India.”

TRANSLATION: “China, India and other emerging markets have resumed their rapid growth with surprising speed, but despite all my efforts the U.S. is mired in painfully slow growth — and Europe and Japan aren’t doing much better. Sigh.”

ON UNEMPLOYMENT & INFLATION
“The U.S unemployment rate has stagnated for about eighteen months near 10% of the labor force, up from about 5% before the crisis; the increase of 5 percentage points in the U.S. unemployment rate is roughly double that seen in the euro area, the United Kingdom, Japan, or Canada. Of some 8.4 million U.S. jobs lost between the peak of the expansion and the end of 2009, only about 900,000 have been restored thus far. Of course, the jobs gap is presumably even larger if one takes into account the natural increase in the size of the working age population over the past three years.”
“Although I expect that growth will pick up and unemployment will decline somewhat next year, we cannot rule out the possibility that unemployment might rise further in the near term, creating added risks for the recovery. Inflation has declined noticeably since the business cycle peak, and further disinflation could hinder the recovery.”

TRANSLATION: “The economy doesn’t look good to me. I’m worried not only that unemployment will fall very slowly. I’m worried that if the pace of growth doesn’t quicken soon, unemployment could rise. And I just don’t see any hints of inflation out there despite all the yammering from my critics to the contrary.”

ON U.S. FISCAL POLICY
“The Federal Reserve is nonpartisan and does not make recommendations regarding specific tax and spending programs. However, in general terms, a fiscal program that combines near-term measures to enhance growth with strong, confidence-inducing steps to reduce longer-term structural deficits would be an important complement to the policies of the Federal Reserve.”

TRANSLATION: “I really don’t want to get into a partisan slugfest over taxes and spending, but Congress and the White House would make the Fed’s job a heckuva lot easier if it did some short-term fiscal stimulus packaged with credible deficit-reduction that would take effect later when the economy is stronger. Please.”

THE DOLLAR
“Much of the decline over the summer in the foreign-exchange value of the dollar reflected an unwinding of the increase in the dollar’s value in the spring associated with the European sovereign debt crisis. The dollar’s role as a safe haven during periods of market stress stems in no small part from the underlying strength and stability that the U.S. economy has exhibited over the years. Fully aware of the important role that the dollar plays in the international monetary and financial system, the [Federal Open Market] Committee believes that the best way to continue to deliver the strong economic fundamentals that underpin the value of the dollar, as well as to support the global recovery, is through policies that lead to a resumption of robust growth in a context of price stability in the United States.”

TRANSLATION: “The dollar’s fall earlier this year reflects a sigh of relief from global investors that Europe wasn’t falling apart — at least not then. We’re lucky that when global investors get nervous, they prefer the dollar to any other currency — and we really don’t want to lose that edge. When we cut interest rates or buy billions in bonds, the dollar will fall, of course. That’s textbook economics. But we know the dollar isn’t just any ol’ currency and the best way to maintain the dollar’s premier status is to get the U.S. economy growing again, and that’s what I’m trying to do.”

CAPITAL FLOWS TO EMERGING MARKETS & EXCHANGE RATES
“An important driver of the rapid capital inflows to some emerging markets is incomplete adjustment of exchange rates in those economies, which leads investors to anticipate additional returns arising from expected exchange rate appreciation. The exchange rate adjustment is incomplete, in part, because the authorities in some emerging market economies have intervened in foreign exchange markets to prevent or slow the appreciation of their currencies.”

TRANSLATION: “Global investors are putting money into emerging markets not only because that’s where the growth is, but because investors are betting those currencies have no where to go but up.”

CHINA’S RESERVES
“A key driver of this “uphill” flow of capital [from emerging markets to developed economies] is official reserve accumulation in the emerging market economies that exceeds private capital inflows to these economies. The total holdings of foreign exchange reserves by selected major emerging market economies, have risen sharply since the crisis and now surpass $5 trillion –about six times their level a decade ago. China holds about half of the total reserves of these selected economies, slightly more than $2.6 trillion.”

TRANSLATION: “The only reason the Chinese yuan isn’t rising faster is that China is selling it heavily and buying dollars, and you can see this by looking at how huge their hoard of U.S. dollars has grown.”

CHINA’S ‘CURRENCY UNDERVALUATION’
“Currency undervaluation on the part of some countries has been part of a long-term export-led strategy for growth and development. This strategy, which allows a country’s producers to operate at a greater scale and to produce a more diverse set of products than domestic demand alone might sustain, has been viewed as promoting economic growth and, more broadly, as making an important contribution to the development of a number of countries. However, increasingly over time, the strategy of currency undervaluation has demonstrated important drawbacks, both for the world system and for the countries using that strategy.”

TRANSLATION: “Holding down your currency to boost your exports has been a winning strategy for emerging markets around the world for some time — Japan, Korea, etc. — but it is now causing some big problems for China and for us.”

THE DRAWBACKS
“First…, currency undervaluation inhibits necessary macroeconomic adjustments and creates challenges for policymakers in both advanced and emerging market economies. Globally, both growth and trade are unbalanced, as reflected in the two-speed recovery and in persistent current account surpluses and deficits. Neither situation is sustainable. Because a strong expansion in the emerging market economies will ultimately depend on a recovery in the more advanced economies, this pattern of two-speed growth might very well be resolved in favor of slow growth for everyone … ”

TRANSLATION: “The Chinese are going to screw up things for everyone if they don’t let the currency rise faster.”

“Second, the current system leads to uneven burdens of adjustment among countries, with those countries that allow substantial flexibility in their exchange rates bearing the greatest burden … ”

TRANSLATION: “The Chinese are making life miserable for countries like Brazil, South Korea, India, South Africa, Israel, and others that let their currencies move more freely, but are now at a competitive disadvantage because China won’t let its currency rise faster. All this flak should be direct at Beijing, not at Washington.”

“Third, countries that maintain undervalued currencies may themselves face important costs at the national level, including a reduced ability to use independent monetary policies to stabilize their economies and the risks associated with excessive or volatile capital inflows.”

TRANSLATION: “China would have a whole lot easier time managing its inflation problem if it let its currency rise, and that would make it easier for its neighbors to let their currencies rise too — and that would discourage hot money from flooding those countries to bet on further currency appreciation.”