WASHINGTON — Federal Reserve chairman Ben Bernanke told central bankers Friday that a structurally flawed international monetary system that perpetuates persistent global imbalances threatens everyone with slow growth.
Bernanke used back-to-back appearances in Frankfurt, Germany, to warn of self-defeating export-led growth strategies that place the burden of adjustment on advanced economies with flexible exchange rates on which developing economies depend.
Much of his criticism appeared aimed at China. A chart he used to illustrate his arguments identified China, Taiwan, and Hong Kong as having constrained their currencies the most to make their goods cheaper to foreign buyers.
Ultimately, he said, export-led growth strategies that depend on undervalued currencies cannot succeed, because they hobble the growth of export customers in advanced economies.
Diane Swonk, chief economist at Mesirow Financial, said in a research note that the most effective way for China to dampen its growth is to allow its currency to appreciate relative to the dollar.
“In other words: China, you can tinker with rates all you want, but you will be stuck with the easy monetary policy that we need to boost our growth until you unhinge your currency from the dollar,” Swonk said. “The world economy has failed to rebalance and we are all paying the price, with the developing world suffering accelerated inflation and the developed world, particularly trade-deficit economies like our own, risking a double-dip recession and deflation.”
— Market News International
