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YOU CAN TELL A LOT ABOUT PEOPLE from their choice of recreation. That also goes for Federal Reserve chairmen.
Paul Volcker is a fisherman, a pastime that takes great patience and persistence. It is a solitary endeavor, requiring stamina and a willingness to put up with the elements. Alan Greenspan plays tennis; my guess is that serve and volley isn't part of his game, but instead he sticks to the baseline and looks for small advantages against his opponents to score points.
Then there's Ben Bernanke, who likes to play basketball. Defense is a big part of the game. And while the rule book says basketball is a non-contact sport, anybody who believes that has never set foot in a gym, let alone a New York City playground.
After taking a barrage of elbows from critics seemingly scoring points at will, Bernanke picked up his defense Friday. In a speech at a European Central Bank conference in Frankfurt, countered his critics and turned the tables on them. They were the problem, not the Fed's policies, he asserted.
Criticism of the Fed's program to purchase an additional $600 billion of Treasury has been withering and has come from many and hugely disparate quarters, ranging from resurgent Republicans in Congress to Germany to China to conservative economists and pundits. They come down to the Fed's securities purchases—a modern form of money printing—will debase the dollar and send prices soaring. Given the greenback's decline and the jump in commodities prices, evident to all who have filled up their gas tank recently, the critics seem to have a point.
The problem, Bernanke shot back, is emerging-market nations that have recovered strongly from the financial crisis are thwarting an appreciation of their currencies. That, he contends, is preventing a global rebalancing, keeping unemployment high in the older, developed economies and pushing up inflation in the so-called emerging economies. (A misnomer, to be sure; they've long since "emerged" and are pacing the world.) Regardless of euphemisms, the real target was China, which has been among the most vocal of the Fed's critics.
Continued high unemployment and low inflation justifies expansionary monetary policy in the U.S., which necessarily results in a lower exchange rate for the dollar. But China and other nations prevent the currency adjustment by intervention, which means buying dollars and accumulating foreign-exchange reserves, another form of printing money by foreign central banks. The resulting rise in food prices, a far more important factor in Asian countries, is sending inflation sharply higher.
All of which may be part of Bernanke's plan, writes Societe Generale's keen strategist, Albert Edwards. If the surge in food prices feeds into wages, will force a real (after inflation) rise in the yuan's exchange rate, he writes.
China well remembers the 1989 Tiananmen Square uprising, which followed "runaway" 28% inflation, Edwards observes. Chinese authorities are responding aggressively to the current inflation threat, tightening monetary policy (the effectiveness of which he's dubious) and introducing food price controls and cracking down "on those old scapegoats, 'the speculators,'" he concludes.
Bernanke has a point, however; the adjustment burden is thrust upon the weaker, deficit nations while the stronger, surplus nations have less pressure to adjust fiscal and monetary policies. That was the case leading up to the Great Depression of the 1930s, when the gold standard was in place. So it is now under floating (but government-manipulated) exchange rates.
But whether Bernanke changed market opinions with his defense of the Fed's money-printing policies is another matter. The Fed will keep its policy on full-throttle, regardless. The problem is that other nations are loath to go along.
The Fed chairman still has to convince the bond market, which has sent yields sharply higher—precisely the opposite effect QE2 was designed to have. But he's not taking the criticism of U.S. monetary policies lying down.
Comments? E-mail: randall.forsyth@barrons.com
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