At first sight, there is little that is stunning or controversial in Chairman Bernanke’s remarks today at the Paris launch event for the Banque de France’s Financial Stability Report. He provides an elegant historical perspective and analyzes how emerging economies can address the persistence of global imbalances.
Such a first impression, while understandable, is partial. The Chairman’s remarks will likely raise eyebrows among policymakers in emerging economies. Rather than provide a harmonious assessment of global imbalances, the remarks highlight persistent differences in analysis that complicate policy discussions at the G-20.
Understandably, Chairman Bernanke provides a US-centric view of global imbalances, including what should be done and by whom.
According to him, today’s large cross-border flows (which “are once again posing some notable challenges for international macroeconomic and financial stability”) reflect the multi-speed nature of the post crisis global recovery. They are consistent with the divergence in monetary policy among advanced and emerging economies (namely, “accommodative monetary policies” in the former and policy tightening in the latter, including today’s hike in reserve requirements by China). And the challenges can be addressed by emerging economies which “have a range of powerful—although admittedly imperfect—tools that they can use to manage their economies and prevent overheating.”
All this is true; but it’s not necessarily the whole story. To illustrate, consider a different perspective—that of most emerging economies.
From this perspective, large capital flows reflect primarily the unwillingness of advanced economies to deal forcefully with the trio of (i) structural issues that inhibit sustainable high growth and employment creation, (ii) post-bubble disorders, and (iii) a secular global re-alignment. Rather than confront these three realities, advanced economies are seen to just kick the can down the road through massive liquidity injections. In the meantime, others have to deal with the negative externalities of having so much liquidity sloshing around the system.
The large provision of liquidity by advanced countries is driving their economic activity and bolstering asset prices. Policy makers intend for this to trigger a sustainable handoff from public sector to private sector led growth.
That is the perceived benefit of the policy stance. Yet, as Chairman Bernanke noted in his last Jackson Hole speech, there are also “costs and risks.” And that is what the rest of the world is worried about.
Due to structural realities and the residual impact of the global financial crisis, the US economy is unable to absorb productively all the liquidity. Like water thrown at a hard surface, the unabsorbed portion splashes everywhere.
It is felt in the form of large capital flows to emerging economies that are already overheating. It pushes commodity prices, including food and energy, already feeling the impact of demand-supply imbalances. And it fuels asset bubbles around the world.
Think of all these as the negative global externalities of the liquidity policies being pursued by advanced economies. And these externalities have economic, financial, political and social consequences.
Emerging economies do not share the Chairman’s view that they possess sufficient ability to deal with all this. Rather than internalize these externalities, they are trying to insulate themselves from what they view as excessive policy denial in advanced economies. And the overall result includes, but is not limited to, persistent global imbalances, growing inflationary pressures, and future financial instability.
Chairman Bernanke rightly states that “our collective challenge is to reshape the international monetary system to foster strong sustainable growth and improve economic outcomes for all nations.” It is an urgent challenge that will require, as the Chairman states, strengthened international cooperation.
Such cooperation will not materialize unless advanced and emerging economies converge on a common analysis of the key issues. My hope is that the G-20 meeting will take an important step in this regard, and do so by recognizing that there is more than one perspective to today’s global challenges. I fear, however, that this may not materialize as yet.
Mohamed El-Erian is chief executive and co-chief investment officer of Pimco.