SPEAKING
FREELY History reserves a sad place
for next Fed boss By Toni Straka
Speaking Freely is an Asia Times
Online feature that allows guest writers to have
their say. Please click hereif you are interested in
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The nomination of
Ben Bernanke, head of US President George W Bush's
Council of Economic Advisers (CEA), as successor
to Federal Reserve Chairman Alan Greenspan has
sparked a hot international discussion about the
future course of US monetary policy.
The
academic world fiercely debates whether Bernanke
will be a "hawk" who is not afraid to fight
inflationary pressures with higher interest rates
or a "dove" who prefers to let the stuttering
economy rumble ahead on a cushion of cheap credit.
But gyrating capital markets obviously fear the
latter.
Ben "Printing Press" Bernanke's
reputation is engraved in stone with weary asset
managers since he said in a speech in
November 2002,"the US government
has a technology, called a printing press - or,
today, its electronic equivalent - that allows it
to produce as many US dollars as it wishes at
essentially no cost."
Such a stance
certainly pleases Bush who has been running up
more debts than any other president in US history
and is for this reason actually the biggest enemy
to a sound monetary policy in times of rising
inflation. Public debt jumped from US$5.8 trillion
to more than $8 trillion (that is
$8,000,000,000,000) since he took office in 2001,
and he is the first president who has never vetoed
any costly bill Congress has presented to him.
Be it $80 billion per year for the war in
Iraq on top of the $430 billion the Pentagon needs
to keep its war machine running on idle, $225
billion for a renovation of the US highway system
(including a $220 million bridge to an uninhabited
island in Alaska) or some $200 billion for
rebuilding efforts after the hurricanes in the
southern US, Bush has always been a happy spender.
At the same time he has aggravated the fiscal
situation by numerous tax cuts benefiting the
upper crust of America's society. By the time Bush
leaves the White House, the US debt will scratch
the $10 trillion level.
Uncertain times
lie ahead. The man who gave Bernanke the job is
actually his worst enemy. While Greenspan is
trying to save his legacy as the Fed chairman who
oversaw the longest peacetime expansion of the US
economy from 1987 to 2001 by notching up the
leading interest rate in baby steps of quarter
percentage points and has difficulties keeping
energy-induced inflation in check, Bernanke has a
lot of work at hand to build a reputation of being
as independent of the White House administration
as Greenspan was.
Being groomed in the
White House before his return to the Fed, where he
served as a governor for three years before his
current tenure into Bush's innermost circles, is
certainly not of help. At his post in the White
House Bernanke missed the chance to caution Bush
against a continuation of the explosive growth of
US government debt.
Greenspan did too
little, too late US inflation, meanwhile,
has already accelerated to an annual rate of 4.7%
in September, up from 3.3% at the end of 2004, a
trend that could derail Greenspan's reputation
from being "The Maestro" to simply "Easy Al" who
will be remembered for doing "too little, too
late", his predecessor, Paul Volcker, said in
April.
The mandate of the Fed is a
delicate issue, as the world's most-important
monetary authority has not only to guard against
inflation - which it does by raising interest
rates - but also has to keep employment at the
highest-possible level, which is achieved by low
interest rates that encourage businesses to
invest.
While Greenspan came from the
private sector and was described by his colleagues
as a data-driven chairman with little regard for
ideology while on the job, Bernanke's last
position at the CEA certainly puts him much closer
to the happy spenders in the White House and
Congress, where most Republican politicians see no
problem in keeping the money-tap wide open. They
trust that China and the other Asian exporters
will stay forever happy selling their goods for
evermore American debt paper, which are just an
obligation to pay later.
The US itself has
little left that it can export save for the US
dollar and ATPs - Advanced Technological Products,
a euphemistic term for a combination of weapons
and computers used in the trade-deficit
statements. But even as the biggest arms dealer in
the world, US sales of killing devices no longer
outweigh the imports of computers manufactured
mostly in Taiwan and China.
In the first
eight months of 2005 the trade deficit widened
from $427 billion to $500 billion compared to the
same period a year earlier. A nation once envied
for its textiles (jeans), big cars and computers,
"Made in the USA" has become a second choice for
the same products now manufactured by the new
industrial giants, China and India.
The
game has worked so far because the rest of the
world could rest assured, knowing their dollars
would always be a stable reserve currency happily
accepted by all.
Rising inflation is
the biggest threat Rising inflation has
changed this picture altogether. China is building
up a strategic petroleum reserve financed by
selling part of its gigantic dollar holdings,
which is a result of the fact that commodities are
becoming reserve currencies these days.
Russia has quietly lowered the dollar part
of its total foreign-exchange reserves from 90% to
70%. South Korea's announcement to diversify out
of the dollar sent the dollar into a free fall for
a day until its central bank issued a statement
that it did not plan such a move, only again to
renounce this statement a day later. Japan, with
$800 billion the biggest holder of US debt papers,
just remains silent as it knows it has no cheap
way out of the dollar-devaluation dilemma. If
markets get the idea that Japan is starting to
sell its dollar papers, the US currency would
certainly start a tumble that could turn into a
crash that would lead to global impoverishment
since 75% of all investments are denominated in
greenbacks.
Problems on several
fronts Now Bernanke faces problems on
several fronts, and the world, especially capital
markets, will watch his every move closely. If he
is to keep the dovish Greenspan policy of baby
interest-rate steps he risks losing on the
inflation front, with energy prices surging anew
in the face of a growing supply-demand gap. This
can lead to a devaluation of the dollar as its
holders will try to get rid of a currency that
buys less and less every month.
Playing
the hawk, on the other hand, and propping up the
dollar with higher rates could lead the US economy
into a low- to no-growth environment, a situation
Bush will probably try to prevent at literally all
costs before the mid-term elections in 2006.
Taking from his first remarks at Monday's
news conference, which were a kowtow to Bush, I am
more willing to gamble on a dovish Bernanke. The
world has seen enough examples of how the White
House wipes out critical voices at all levels.
Gaining the same credibility as Greenspan,
whose words can make markets turn on a dime, will
be a tough task for Bernanke, whose bio shows a
long list of academic credentials but not that
much on-the-job experience. Skeptics fear he will
rely too much on economic models and to a lesser
extent on current data.
But there are also
enthusiastic endorsements of him. James D
Hamilton, professor of economics at the University
of California in San Diego, wrote in an initial
reaction: "I've disagreed with Bernanke on a
number of specific issues over the years ... But I
will be doing so from a position of respect for
the new office holder". Hamilton called him a
first-rate mind.
The former economic
adviser to president Bill Clinton, Brad Setser,
wrote that Bernanke "probably appeals more to the
center and the center-left than the supply-side
right".
Interestingly Republicans voiced
more concerns. The National Review, a haven for
dyed-in-the-wool conservatives, has been launching
hit-pieces against Bernanke, although little
validity can be attributed to their frothy
criticism.
A sad place in
history? Bernanke, 51, will certainly try
his best to serve the maximum term of 14 years at
the top of the Federal Reserve Board and keep the
American economy in the best shape possible. But
the son of a pharmacist and a teacher from South
Carolina could be handed a sad place in history
and it will not be his fault.
Not even the
most brilliant head at the Federal Reserve Board
will be able to prevent the decline of the
American empire as long as we see a continuation
of the policies made by the persons currently
residing in the White House.
The questions
of the future are not so much whether Bernanke
will be a hawk or a dove. The question is whether
the US government will find out soon enough that
in an interconnected world they can no longer
follow a petro-theist foreign policy financed with
the money of others.
Looking at the
numerous problems the US government faces - and
taking into account that not one of them has yet
been addressed - the major problem is not whether
one brilliant economist with loads of academic
credentials replaces another. Rather, it lies much
more with the future course of American policy and
the results of it on its economy. Or let me say it
this way: The problem is not A(lan Greenspan) or
B(en Bernanke) - it is (George) W (Bush).
Toni Straka is a Vienna,
Austria-based independent financial analyst and
portfolio manager, who worked as a financial
journalist for over 15 years and now evaluates
global market trends. He runs a blog, The Prudent
Investor, that focuses on the global
redistribution of wealth. He can be reached at
tos1010@yahoo.com
(Copyright 2005 Toni
Straka)
Speaking Freely is an Asia
Times Online feature that allows guest writers to
have their say. Please click hereif you are interested in
contributing.
