Federal Reserve Chairman Ben S. Bernanke called on the U.S. to save more by cutting the federal deficit and said Asian nations should promote domestic consumption to avert a return of trade distortions that preceded the financial crisis.
“The United States must increase its national saving rate,” Bernanke said today at a San Francisco Fed conference on Asia and the global financial crisis. “The most effective way to accomplish this goal is by establishing a sustainablefiscal trajectory, anchored by a clear commitment to substantially reduce federal deficits over time.”
Group of 20 leaders pledged last month to cooperate in shifting the global economy to “sustainable and balanced growth” and, with the help of theInternational Monetary Fund, to monitor each country’s patterns of demand and supply, credit, debt and increases in reserves. Bernanke called for policies to rebalance growth with higher private and government saving in the U.S. and less reliance in Asia on exports.
“It’s important, and I think policy makers recognize we need, to develop a fiscal exit strategy which will involve a trajectory toward sustainability,” Bernanke said in response to an audience question at the Santa Barbara, California, conference. “That’s critically important in order to maintain confidence in our economy and confidence in our currency.”
Record Deficit
China’s current-account surplus fell from about 10 percent of gross domestic product in the first half of 2008 to about 6.5 percent of GDP in the first half of this year, Bernanke noted. The U.S. continues to rely on foreign investors to finance a record deficit funded in part by foreign-exchange earned through exports to the U.S.
International investors owned $3.45 trillion of Treasuries in August, up from $3.08 trillion in December. China was the biggest foreign holder of U.S. government debt with $797.1 billion. It owned $727.4 billion in December, according to Treasury data released Oct. 16.
Within the G-20 nations, “there is an understanding that relying on export-led growth has been part of the problem,” said Alan Ruskin, head of currency strategy at RBS Securities Inc. in Stamford, Connecticut. Global policy makers will have to find common ground, and that “is a lot about where the Chinese own interests lie.”
“There is definitely a strong case to be made for the appreciation of the Chinese yuan starting again,” he said.
The Fed chairman presented a chart that showed several countries most open to trade suffered the worst declines in growth relative to normal trend rates.
‘Economic Shocks’
“Tighter integration with the global economy naturally increases vulnerability to global economic shocks,” he said. It also promotes stronger economic growth, and “protectionism and the erecting of barriers to capital flows should thus be strongly resisted,” Bernanke said.
Bernanke didn’t discuss the U.S. economy or the near-term path of U.S. interest rate policy in text of his remarks. The Federal Open Market Committee next meets Nov. 3-4.
U.S. stocks rose, extending an advance in equities from Shanghai to London, while Treasuries were mixed. The Standard & Poor’s 500 Index rose 1 percent to 1,098.97 at 3:08 p.m. in New York. Yields on U.S. two-year notes rose 2 basis points to 0.967 percent, while yields on the 10-year note fell 2 basis points to 3.39 percent. A basis point is 0.01 percentage point.
Raise Interest Rates
Central bankers around the world are also discussing and acting on strategies to raise interest rates. Australia increased rates this month, the first G-20 nation to do so since the crisis intensified a year ago. The Australian and New Zealand currencies rose today versus the U.S. dollar on signs of economic strength and in anticipation of more rate increases.
Separately, the New York Fed said today it is working with market participants to refine a reverse repurchase agreement tool to help drain the record amount of cash it has added to the financial system. The district bank said the work is a matter of “prudent advance planning” and “no inference should be drawn about the timing of monetary-policy tightening.”
China’s yuan forwards rose to a 14-month high on speculation the economy’s recovery from a slump will prompt policy makers to let currency appreciation resume. The exchange rate has been kept at about 6.83 per dollar since July 2008, following a 21 percent gain in the previous three years, as the government favored a stable currency to help exporters weather a global recession.
Data due Oct. 22 will show China’s economy expanded 9 percent in the third quarter, the fastest pace since September 2008, according to the median estimate of economists surveyed by Bloomberg.
‘Distort the Mix’
“Trade surpluses achieved through policies that artificially enhance incentives for domestic saving and the production of export goods distort the mix of domestic industries and the allocation of resources, resulting in an economy that is less able to meet the needs of its own citizens in the longer term,” Bernanke said.
Bernanke said American consumption fueled by high savings rates abroad played a role in the financial crisis.
“A lot of capital flowed” into countries such as the U.S., “which would not be a problem if we had invested and managed that money appropriately,” Bernanke said in response to an audience question. “But evidently, we were not able to do that.”
‘Overwhelmed’ Risk Management
Bernanke said both private and regulatory risk-management mechanisms “were overwhelmed.”
The FOMC reiterated its pledge last month to keep the benchmark lending rate near zero “for an extended period” to boost a weak recovery that has yet to create jobs. The unemployment rate rose to 9.8 percent last month, the highest level since 1983. The economy will grow at a 2.4 percent annual pace in the final three months of the year, according to a Bloomberg News survey of economists. The unemployment rate will hit 10 percent in December, the forecasters said.
Bernanke in today’s speech didn’t engage in the debate among his colleagues on the FOMC over the pace or timing of a change in monetary policy. Fed Governor Kevin Warsh said Sept. 25 interest rates may need to rise “with greater force” than usual, while New York Fed President William Dudley said Oct. 5 the recovery’s pace “is not likely to be robust” and inflation risks are “on the downside.”
