Friday, February 4, 2011

It's Your Fault, Not Mine!

The headlines this morning from London: “Fed Denies Policy is Causing Rising Food Prices.” (

Ben Bernanke, Chairman of the Board of Governors of the Federal Reserve System, spoke to the National Press Club yesterday and basically said:

“It’s Your Fault!”

The response: “No, it isn’t!”

Bernanke’s come back: “’Tis too!”

And, so we see the basic defense the leader of our central bank relies upon. “The problem is ‘out there’, it’s not in here!”

Bernanke: “I think it’s entirely unfair to attribute excess demand pressures in emerging markets to U. S. monetary policy, because emerging markets have all the tools they need to address excess demand in those countries. It’s really up to emerging markets to find appropriate tools to balance their own growth.” (

Throughout his history at the Fed, Bernanke has always seen our problems as coming upon us from someone else or somewhere else in the world. Our problem in the early 2000s was the fault of the Chinese because they saved too much! Our problem in the housing bubble was that others in the rest of the world purchased the mortgage-backed securities being created to finance residential real estate! Our problem in the summer of 2007 was that inflation still had to be combated because prices were rising too fast in the rest of the world. (See chart in this article on world food prices to confirm this: And, now, other countries are not acting strongly enough to combat rising food prices in the rest of the world.

Here is the problem: Bernanke is so focused on the fact that nothing is our fault that he is constantly behind the curve. Yesterday, I wrote in my post

“But, why should we expect the Federal Reserve to back off from QE2 any time soon? Chairman Bernanke has been late on every shift in monetary policy since he has been a member of the Board of Governors. Why should we expect anything different this time?” (

Bernanke’s thought process might be correct in a world in which the international flow of capital was severely constrained. Bernanke is a first class world academic when it comes to studies of the Great Depression of the 1930s. That world was a world of severely restricted flows of capital between countries.

In fact, the limited international capital movements was a part of the policy prescriptions of the world at that time. John Maynard Keynes was a strong advocate for restricted capital flows in the world. (

Keynes, and other participants in the construction of the Bretton Woods international financial system, built constrained international capital flows into the very rules of the post-World War II monetary framework.

The reason for restricting international flows of capital? In such a regime, countries could conduct their economic policies independently of one another. In such an environment, a country could forget about what was happening “out there” and focus solely on what was happening “in here.”

The world didn’t cooperate with this desire to limit capital flows and as the barriers to international flows of capital broke down in the 1960s, the Bretton Woods system had to go. The final nail in the coffin was applied by President Richard Nixon on August 15, 1971 as he took the United States “off gold” and floated the value of the United States dollar.
Capital flows freely around the world and so the United States cannot just act as if it is the only player in the world. Yet, this seems to be exactly what Bernanke wants.

Answer this: what three countries or organizations in the world hold the most amount of U. S. Government debt?

In order of magnitude: the United States with $1,138,166 million as of the close of business on February 2, 2011 ($1.138 trillion); China, a little less than $0.9 trillion; and Japan, a little less than China.

What can we take-away from this?

Capital is flowing freely throughout the world!

The contribution made by the United States to these flows is enormous!

The flows of this capital must look like a huge wave coming up on their shores, like a tsunami hitting most of the countries in the world!

But, Mr. Bernanke argues that “…emerging markets have all the tools they need to address excess demand in those countries. It’s really up to emerging markets to find appropriate tools to balance their own growth.”

What he really is saying is, "I want to do my thing...and I am big enough to do what I want. You just have to live with what I do. I can have an independent economic policy because of my size. Too bad you are not big enough to be able to conduct your own independent economic policy."

Mr. Bernanke has invested too much of his intellect in the study of the 1930s. Mr. Bernanke needs to become a part of the 2010s.

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