Date: August 29, 2006 7:08:13 AM PDT
Subject: Reality Check - Bernanke's International Time Bomb
Gary North's REALITY CHECK
BERNANKE'S INTERNATIONAL TIME BOMB
A week ago, I described Alan Greenspan's time bomb,
which he passed off to Ben Bernanke last February. This
time bomb is the huge build-up of fiat money that enabled
Greenspan to escape the 2001 recession without a scratch.
There are three things that Bernanke can do about: (1)
continue the FED's policy of stable money, which will
detonate it within months; (2) reverse course and expand
the money supply, which will roll the clock forward but
will add to the explosive material; (3) resign.
Bernanke is paying no public attention to this time
bomb. He is also ignoring another: the time bomb of
international credit.
The FED is tightening money. See the chart for the
adjusted monetary base.
This has produced an inverted yield curve in the
United States, which is the forerunner of a recession.
Other major central banks are following the FED's lead
in their domestic monetary policies. This is an
international policy. If it produces a recession in the
United States, the whole world will be affected.
Unemployment will rise. Stock markets will fall.
This is the immediate monetary background of
Bernanke's most recent speech.
THE SPEECH OF THE YEAR
On August 25, Bernanke gave what has become The Speech
of the Year for Federal Reserve Board chairmen. This is
the annual speech at Jackson Hole, Wyoming. Bernanke's
speech there was his first as chairman. It is the 30th in
the series.
I described Jackson Hole in a report I published last
October. It is the Western summer playground for America's
elite. It has been for at least eight decades. Here is
part of what I wrote.
The area around Jackson Hole, Wyoming, is one of
the prime areas where the Rockefellers own large
tracts. This area has long been the focus of a
Rockefeller-inspired lock-out, beginning in 1919.
Land values there reflect this: astronomical.
I have known about this connection for almost 30
years. It has become ever-more expensive.
So, attending the FED chairman's speech is a kind of
summer retreat for senior officials and commercial banking
elite. The press never mentions the oddity of the location
for a speech on economics. Why should they? Press members
get a nice summer vacation when they are assigned the task
of covering the speech. They may even get to hear a few
words -- off the record -- uttered by super-rich owners of
summer properties in the area.
Bernanke's speeches are academic affairs. He always
includes footnotes and bibliographies. These
bibliographies are far more valuable for academic
researchers than anything he says in his speeches. The
bibliographies show what Bernanke has read and what he
thinks is important. Greenspan never revealed what he
thought was important.
INTERNATIONAL CAPITAL MARKETS
Bernanke's speech dealt mainly with protectionism.
This is a nice, safe topic for an academic economist. It
is the defining doctrine for free market economists. It
has rarely been abandoned ever since David Hume defended it
in the 1750s and Adam Smith did in 1776. Free trade for an
economist is what the right to vote is for a politician:
never to be questioned in public, but legitimate to abandon
whenever trade restrictions favor the group that is paying
his salary.
Bernanke spoke of protectionism as a serious
possibility. I do not take him seriously on this.
Protectionism would shrink the division of labor. It
would make most people poorer. But the primary defenders
of tariffs and quotas today are labor union members in
manufacturing, whose numbers are shrinking and whose
political clout has been shrinking with their declining
numbers.
The big push for free trade in my era came from John
F. Kennedy, who promoted GATT: the General Agreement of
Tariffs and Trade. By promoting international trade, he
did more to break union power than anyone else in American
politics. The only person who came close in this effort to
undermine trade unionism was Teddy Kennedy, whose support
in the Senate was crucial for the liberalized 1965
immigration law of Lyndon Johnson, which has provided a
stream on non-union workers to American employers.
Bernanke knows this history.
In the policy sphere, tariff barriers--which had
been dramatically increased during the Great
Depression--were lowered, with many of these
reductions negotiated within the multilateral
framework provided by the General Agreement on
Tariffs and Trade.
No President has challenged free trade since Kennedy.
Some have violated this or that implementation of free
trade. All have supported quotas on sugar imports, as has
Congress. But there has not been a hint of any national
roll-back of Kennedy-era reductions in tariffs and trade.
Bernanke praises this fact.
Progress in trade liberalization has continued in
recent decades--though not always at a steady
pace, as the recent Doha Round negotiations
demonstrate. Moreover, the institutional
framework supporting global trade, most
importantly the World Trade Organization, has
expanded and strengthened over time. Regional
frameworks and agreements, such as the North
American Free Trade Agreement and the European
Union's "single market," have also promoted
trade. Government restrictions on international
capital flows have generally declined, and the
"soft infrastructure" supporting those flows--for
example, legal frameworks and accounting
rules--have improved, in part through
international cooperation.
Bernanke's speech was a long cheerleading effort for
those governmental organizations that regulate
international trade. What he and his listeners want is not
free trade. What they want is international bureaucratic
control of national economic policies. This has been a
Rockefeller-supported effort going back to the era prior to
World War II.
He spoke of recent opposition to this development.
But where is this opposition? Pat Buchanan opposes free
trade. There are organized anti-globalist activist groups
that oppose it. What is noticeable is that these opponents
have no political base in Congress. There are politically
ineffectual.
Bernanke says that globalization is growing very
rapidly, affecting domestic economies in unprecedented
ways. Yet in his speech, he revealed something that I
would not have guessed. As a percentage of national
output, net international capital flows today are about the
same as a century ago.
Although the net capital flows of a century ago,
measured relative to global output, are
comparable to those of the present, gross flows
today are much larger.
THEN WHAT'S THE PROBLEM?
Late in his speech, Bernanke got to the point: the
financial capital markets, not the physical goods markets.
Moreover, capital flows now take many more forms
than in the past: In the nineteenth century,
international portfolio investments were
concentrated in the finance of infrastructure
projects (such as the American railroads) and in
the purchase of government debt. Today,
international investors hold an array of debt
instruments, equities, and derivatives, including
claims on a broad range of sectors. Flows of
foreign direct investment are also much larger
relative to output than they were fifty or a
hundred years ago.
Why should we care? Because the world's central banks
have acted as lenders of last resort since the end of World
War II. They have served as unofficial insurance
companies. Yet what they are unofficially insuring is
becoming ever-more complex.
Bernanke did not say this. He did not even hint at
this. Yet this is the problem of problems facing central
bankers: the threat of a break in the payments system due
to a large, unpredictable, and disrupting bankruptcy of a
major player in the financial capital markets.
Bernanke's official concern is with the political
reaction of special interests hurt by free trade.
Further progress in global economic integration
should not be taken for granted, however.
Geopolitical concerns, including international
tensions and the risks of terrorism, already
constrain the pace of worldwide economic
integration and may do so even more in the
future. And, as in the past, the social and
political opposition to openness can be strong.
Although this opposition has many sources, I have
suggested that much of it arises because changes
in the patterns of production are likely to
threaten the livelihoods of some workers and the
profits of some firms, even when these changes
lead to greater productivity and output overall.
Yet the real threat to free trade is not domestic
politics; it is the fractional reserve banking system.
Debt is today the legal foundation of money. We have lived
in the era of the organization of debt into currency, as
Charles Holt Carroll defined it well over a century ago.
If there is any break in the debt payments system, the
international monetary system could implode. This would
shrink the international division of labor further and
faster than any hike in tariffs of any country.
The interrelated and interdependent commercial bank
payments system rests on an assumption: there will never be
a break in this payments system. Bank A will always pay
bank B, because Bank C will always pay Bank A. But why
should anyone have such confidence? Because central banks
stand ready to intervene.
The problem is this: The value of currencies traded
daily in the futures markets is around $2 trillion. This
dwarfs the resources of any central bank or consortium of
central banks.
While Bernanke is pointing to unnamed but highly
marginal political interest groups as constituting the
number-one threat to the international division of labor,
he ignores the loosest canon on the deck of the Good Ship
Prosperity: fractional reserve banking. He also ignores
the constant and expanding intervention by internal
bureaucracies, best represented by the World Trade
Organization.
For Bernanke and his listeners, politics is the
crucial factor. The solution to political opposition to
expanding international trade is for domestic governments
to buy off the opposition groups, mainly industrial
workers.
The challenge for policymakers is to ensure that
the benefits of global economic integration are
sufficiently widely shared--for example, by
helping displaced workers get the necessary
training to take advantage of new opportunities--
that a consensus for welfare-enhancing change can
be obtained. Building such a consensus may be far
from easy, at both the national and the global
levels. However, the effort is well worth making,
as the potential benefits of increased global
economic integration are large indeed.
But the number of these workers is constantly
shrinking in the industrial West. And what workers in
China would want to hike tariffs on Western goods? There
are not many products imported into China from the West.
Bernanke refused even to mention today's central bank
monetary policy -- stable money -- as threatening the
economic boom and creating problems for interbank payments.
He refuses to pay attention publicly to Greenspan's ticking
time bomb, which is sitting in Bernanke's lap. This time
bomb is the chief domestic threat to the international
division of labor, not trade unions.
In Bernanke's mental construct of the international
economy, worrywarts in the union movement can be bought off
with government money. Give them some re-training, and let
them make their way into the labor markets should be
sufficient to remove the threat of tariffs and quotas. But
the problem is not tariffs and quotas, which have been
coming down for almost half a century. The problem is the
expansion of government debt, which serves as the monetary
base, which has occurred over the last half century. The
problem is the expansion of private debt, which can be
rolled over -- it is never repaid, net -- only if central
bank policies do not create a liquidity crisis.
TIGHT MONEY
As I mentioned earlier, FED monetary policy is tight.
This indicates that Bernanke is content with Greenspan's
time bomb. He just isn't worried about it. Yet the
repercussions if it explodes will be felt in the
international capital markets.
He worries publicly about trade union opposition to
free trade. He should instead worry about a re-play of the
failure of Long Term Capital Management in 1998. He should
worry about the problem that worried Greenspan's in 1998.
He justified the New York FED's intervention into the
capital markets to persuade the commercial banks to pony up
another three billion dollars. The problem was cascading
cross-defaults. Greenspan testified to Congress in 1998,
In that environment, it was the FRBNY's judgment
that it was to the advantage of all parties --
including the creditors and other market
participants -- to engender if at all possible an
orderly resolution rather than let the firm go
into disorderly fire-sale liquidation following a
set of cascading cross defaults.
There is nothing like a fire-sale liquidation to throw
a money wrench into the globalization process.
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CONCLUSION
Bernanke is shadow boxing with a dying trade union
movement. He is officially ignoring the greatest threats
to the problem his says concerns him: the vulnerability of
the international division of labor: fractional reserves,
the organization of debt into currency, and the universal
assumption that central banks can handle any disruptions in
the payments system, despite the enormous size of the
capital markets in relation to central bank capital.
These is a sense of unreality about Bernanke's first
Jackson Hole speech. He gave his listeners what they
wanted: cheerleading for government-managed globalization.
But he did not mention the existence of a discontinuous,
unexpected, unforeseen, unmanageable threat to this
globalization process.
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