“It is not at all clear that accommodative policies in advanced economies impose net costs on emerging market economies,” Bernanke said today in prepared remarks for a seminar in Tokyo on the last day of International Monetary Fund annual meetings.
Christine Lagarde, on the other hand, said:
…. such easing is likely to cause large and volatile flows that risk leading to “overheating, asset-price bubbles and the build-up of financial imbalances” in emerging economies, even as she applauded Fed efforts to boost growth.
But she thinks he should do it anyway.
Of course the empirical evidence is that such “easy money” policies do indeed cause serious structural imbalances and do destabilize these nations. You need only look at the price of food in these developing economies to find a perfect example.
Note carefully that food is a relatively-minor part of your budget, unless you’re quite poor in America. This is a core characteristic of developed economies; they tend to have quite-high per-capita GDP and as a percentage of personal income food and energy expenses are relatively small. Food, for example, carries a 14.2% weighting in our CPI — that is, it is assumed that you spend about 14% of your income in food. Energy has a roughly 10% weighting in the CPI, and housing has a 31.5% weighting.
Add this all up and you find that approximately 56% of your spending is non-discretionary; that is, you must spend it in some form or fashion to remain alive.
Note that this is for the median household; these percentages do not hold for people at the low or high end of the economic ladder. For the poor, they spend much more comparatively, and for the wealthy, much less.
We’re pretty much right up the middle in this regard when it comes to developed nations — the average is about 16%. However, middle income nations spend 35% of their PCE on food and developing countries spend 55%!
Now consider this — what happens if the cost of food doubles in a developing nation?
That’s simple: The people starve, since you cannot spend more than 100% of anything.
And what is most-sensitive to loose monetary policy? The cost of things that have hard limits on their production because they’re tangible. Food. Energy. Housing.
Indeed, Bernanke’s claim is that he wants to “support housing prices.”
And you might think that this is a “good thing” for America, but you’d be wrong. A significant part of America pays 50% or more of their income toward housing costs — where economists draw the line for being “severely-burdened.” I think they’re being rather glib in this assessment, for someone who is in that situation is probably also paying 20% or more for both food and energy expenses, leaving them dangerously close to being unable to cover the combined bill.
But while food, energy and housing may go up in our country due to loose monetary policy, in the developing world where they must import a good part of their energy and food they go up even more. Not only do you get the inflationary impact that’s local, you also get all of the inflationary impact that comes with a trade imbalance.
Wait — trade imbalance? How is that connected?
Let’s take two nations, both with floating, non-manipulated fiat currencies. One runs a trade imbalance with the other. Capital from the deficit nation therefore flows to the surplus one in payment for the goods and services flowing the other way. This causes the deficit nation’s currency to become weaker because its capital is drained, while the surplus nation’s currency becomes stronger, as it gains capital. That, in turn, causes the relative price of the exported goods from the surplus nation to rise and the trade imbalance is automatically cut off.
Nobody has to do anything manipulative for this to take place. Indeed, unless someone manipulates currencies or trade policies this happens immediately and automatically. It is as simple as arithmetic.
So why hasn’t it happened with the United States and China, for example?
It is precisely because both China and the United States fraudulently manipulate their currencies via both central bank and fiscal policy that this imbalance has been maintained. By emitting credit via deficit spending into the economy the United States intentionally replaces the drained capital with credit money, which spends exactly the same.
Keep this clearly in mind folks: Bernanke’s QE would be literally impossible without Federal deficit spending as there would be no net bond issuance to buy! When you hear Bernanke talking about wanting to see deficits shrink he is lying as it is mathematically impossible for him to engage in his policies without them.
And the Chinese, for their part, recycle the imported capital, lock it up (via “purchasing” Treasury bonds) and engage in crazy GDP-manipulating acts (like building cities where nobody lives.)
The trade imbalance we have with China could not exist over any material period of time but for these intentional manipulations.
But the rest of the world has no meaningful way to play this game. They are forced to sit and spin, so to speak, and deal with the impact of grossly inflated credit and money metrics in our economy should they need to buy anything that we produce. And they do — they need to buy food, which we have a net surplus of and they have a net deficit!
This, my friends, is how Bernanke literally starves the world. We are 330 million people, more or less. We play financialization games and abuse our position as a global reserve currency to force others to subsidize us with their lives.
Does this destabilize developing nations? You bet it does. Hungry bellies breed riots.
They always have and always will; well-sated people have little reason to revolt. Hungry people have 1,001 reasons, starting with the growl in their stomach.
Behind a huge percentage of those hungry bellies is both Ben Bernanke and our Congress.