Bernanke Pulling No Punches.

I must admit, that Ben Bernanke's speech on Friday in Frankfurt, Germany was an excellent speech. Bernanke was clear, thoughtful, and insightful in his remarks. I have been very harsh on Chopper Ben, but I have to give the man his due.

He basically made a passionate point in regards to unemployment stating that millions more on the breadlines was unacceptable. Well of course it is. What Bernanke said on the state of the labor markets and the unemployment rate is open for debate. It is refreshing that he at least for the first time he is openly being empathic to Main Street. For this one point he needs to be given props.

His pointed comments about China and the general state of world trade is something I believe that is not open for debate. I believe that this particular speech basically says to the rest of the world that the USA is not going to be able to grow everyone out of slump they are in. He is making and taking a stance that the whole world if they want to decouple away from the US, he is all in favor of it. His speech on re balancing the world economy is the first salvo being fired stating that the US has surrendered unquestioned financial and economic leadership. Bernanke along with Geithner have started to let the entire world know that you guys are on your own if you don't start to fix the imbalances inherent in your economic systems.  

Look at it this way. We have massive current account imbalances all over the world. The number one reason is CHINA. China is pegging their currency to our dollar. They print up Renmimbi, use it to buy more USD, then use that to buy US Treasuries. This lowers our long term interest rates but massively distorts trade and current accounts here and around the world. The low long term rates were one of the reasons that we had a housing bubble here in the USA. The Fed leaving short rates very low is the biggest reason as all excess savings, leverage, and asset price inflation was exported to emerging markets. Emerging markets then took all of their savings and investment and plowed it back into the US. The credit markets were massively obese from all of the money that was being repatriated back to the states. This is what is commonly called the Global Savings Glut. Money has to go somewhere and it flowed into commodities and credit.

What the result is China has some $1.6T in USD reserves sloshing around in their economy. Normally, the CNY would be a lot stronger, but the Chinese is pegging their currency within a band, so they are manipulating their currency by not allowing it appreciate vs the dollar. This is unquestionably preposterous behavior by the Chinese. Let me first say, its not anything that the US has not tried or even succeeded in doing over the years, but China is really postponing the inevitable free floating of their currency. When that happens, the export party that China has been enjoying is over. This will be very good for Chinese citizens as their purchasing power goes up, but devastating for the Chinese economy as their imports are a lot less attractive at the higher CNY rate.

So what are developed countries and societies to do? The US as well as Europe are stuck in a slow growth high unemployment situation while EM societies struggle with high inflation and huge capital inflows. In essence the developed world is exporting not only jobs but capital and inflation as well. Bernanke is warning China and other Asian Tiger countries to let their currencies appreciate or face another global slow down. A global slowdown that the USA will not be be able to fix by themselves or subsidize. Bernanke is making the point that if Asian societies don't start to de peg from the dollar, the USA will not ease the burden when shocks hit the system. Bernanke in essence is admitting that US policy makers could and would no longer determine policy based on domestic conditions and force the rest of the world to tow the line.

What Bernanke and Geithner have discovered is that after the US housing market collapsed, the economy was severely weakened. We have a trade deficit, high unemployment, and federal deficit that are all structural in nature. US Policy makers have belatedly discovered an inconvenient truth about the virtues of globalism. 

Is this Bernanke's version of Paulson's bazooka? Is he stating that the US is no longer going to take this type of brazen currency manipulations for much longer? That there is a direct consequence for Chinese currency manipulations and that the US will allow the pain to spread much further the next time. You won't have the US cleaning up the mess or trying to re balance the pain the next time.

Bernanke is stating that a "two step" recovery may not be sustainable, that millions in unemployed US workers will have to be dealt with. He has made these similar points to the US Congress as well. Stating that a proper fiscal policy needs to be implemented to reduce structural unemployment and get growth going again.

Bernanke is letting everyone know that he is getting tired of printing money. He is printing money to sustain the US economy because heck no one else seems to care.

Bernanke is acknowledging that globalization has made it impossible for one to conduct efficient monetary policy in one country without global assistance and participation.

The speech that Bernanke made Friday is a very important speech that basically is a pointed threat that states that everyone has to start pulling their own weight and water.