Here is a fantasy. During a press conference, the chairman of the People’s Bank of China, Zhou Xiaochuan, says: “The need to create jobs should concern everyone in China.” He explains that an undervalued yuan supports exports and a large trade surplus keeps away imports which would take away Chinese jobs. Zhou does not mention any possible international dislocations from this stimulative currency policy.
Here is reality. During a press conference on Thursday, Ben Bernanke said, “The weak job market should concern every American.” The chairman of the U.S. Federal Reserve explained that a new policy of printing $40 billion a month into the indefinite future might help reduce domestic unemployment. He did not mention any possible global dislocations from this “highly accommodative stance.”
Zhou’s imaginary speech, which reflects the PRC’s traditional currency policy, would be roundly criticized as irresponsible. Bernanke’s actual pronouncement spawned a big market rally in almost every financial asset other than the dollar. Of course, the Chinese exchange rate and the American money supply are different, but the central bankers’ approach is identical: domestic goals first, second and third, with the global common good left for question time.
It is a dangerous way to conduct monetary policy. A large trade surplus may have helped create jobs in China, but the accumulated funds helped finance the asset bubbles which eventually popped, leading to the current global malaise. The Fed’s previous rounds of quantitative easing just might have helped the American economy, but they almost certainly pushed up commodity prices, which stimulated economic and political tension in many poor countries. They also spawned ill will among the central bankers who were forced to deal with collateral damage from the U.S. war against domestic financial disorders.
China, at least, has an excuse for its home bias - it is a poor country with a history of social instability. The United States is the richest country in the world, even in the midst of a slow recovery from a steep recession. Besides, the dollar is the global reserve currency. That position comes with a global responsibility, which Bernanke seems determined to ignore.