SANTA BARBARA (MarketWatch) — As global economies emerge from recession, policymakers must watch for unsustainable global imbalances driven by high levels of Asian exports and low U.S. savings rates, Federal Reserve Chairman Ben Bernanke said Monday. In a speech prepared for a conference here, Bernanke warned “global imbalances may reassert themselves.” The U.S. must save more, Bernanke said, and the most effective way is “by a clear commitment to substantially reduce federal deficits over time.” Bernanke warned Asian economies must avoid too great a reliance on external demand. Also, policymakers have to balance the risks of withdrawing policy support too early, and cutting off recovery, against waiting too long, “which could overheat the economy.”
There are some disturbing problems with Bernanke’s recommendations and apparently many of the mainstream media outlets have not picked up on it. First of all, China runs its economy as a mercantilist one, or one that is solely interested in its own policies and well being, and thus does not really care two pennies whether or not it is abiding by “trade obligations” that the World Trade organization has set. Indeed, they have been flaunting international calls to float their currency on the open forex market for many years, and import only about 5 per cent and export the rest.
This is a cause for concern because other countries are artificially attracted to the labor and cost savings of this country because of their artificially low financial system. Only until China abides by the rules of the WTO will there be a “trade re-balancing” of the world goods exchange system.
Secondly, Bernanke recommends that Americans start saving money so that the economy can heal itself with these savings. The question we must ask is: how are Americans supposed to save money when the central bank sets interest rates close to 0 per cent? It gives people no incentive to save and only to spend; and this is part and parcel of the plan to bankrupt America because central banks really have no business in setting interest rates.
These technicalities can be set automatically by market forces. For example, if everyone were to keep their money in the country, and kept, for example, 30% of their savings in banks, these savings could be invested by banks to people looking to open businesses. This would improve the economy. As it stands now, the banks are simply giving money away to banks and they are lending it out at exorbitant amounts to businesses; further worsening the credit crunch that the Federal Reserve is trying to fix but ultimately will not in the long run.
For the past ten years, the Chinese growth strategy has been mercantilism, the strategy of maximizing exports and minimizing imports. The key to modern mercantilism is a high savings rate by one’s own population. Those savings provide the needed funds for investment in new factories and are loaned to one’s trading partners so that their trading partners can buy imports. Unfortunately for China, mercantilism doesn’t keep working in the long run. It succeeds magnificently when the goal is to bring down one’s trading partners. Indeed France and England used mercantilism in the 16th and 17th centuries to bring down Spanish power (Trade n Taxes blog).
A number of factors have been combining to force Asian stocks to continue their downward trajectory. Starting with U.S. stocks that closed lower yesterday, which triggered a wave of profit taking as investors locked in profits given their recent high. Coupled with the dollar peak and risk appetite, decreased misfortunes appeared once more on the outlook for the global economy that pessimists focused on the growth of China’s lack of expectations and not the fact that the economy is indeed overheating.
Carl Delfeld, editor of ChartwellETF.com, says China’s economy may face big problems as overcapacity and overheated bank lending result in a sharp slowdown. The country has substantial overcapacity in manufacturing, real estate, and infrastructure, as well as deteriorating credit quality and weakening export markets. All of these factors will lead to a growth rate far below that expected by the markets and will, in turn, lead to a China crisis, circa 2010 (Delfeld, Moneyshow).