Ben Bernanke has been “littering” all over the globe for years. Quite a few countries have had to clean up after he has scattered some “trash”. Bernanke acknowledged that he has been littering outside of US borders in a speech in Tokyo on Saturday (Link). Ben defended his global scattering of bits of paper with:
Assessments of the international impact of (QEIII) should give appropriate weight to their beneficial effects on global growth and stability.
So Ben thinks that US trash is good trash.
Ben did not go to Japan to defend US monetary policy. He traveled around the world to deliver a very specific message. He was very pushy about the need for Emerging Market economies to allow their currencies to appreciate versus the dollar. Ben’s words that will, no doubt, raise some eyebrows in Beijing:
"In some emerging markets, policy makers have chosen to systematically resist currency appreciation as a means of promoting exports and domestic growth"
Ben did not mention a specific country that was abusing its currencies value, but it was clear he was talking about China. The WSJ’s Jon Hilsenrath confirmed that China was the target of Ben’s ire (Link). (Note: You can safely assume that Jon confirmed this with Ben before putting it in print)
The passage was an apparent shot at authorities in China
So Ben thinks that China’s trash is bad trash.
Is ‘trash’ the consequence of manipulation of an FX rate, or is ‘trash’ left behind when there is manipulation of long-term interest rates? That’s a pretty fine line. Bernanke has crossed it.
There are some developments in China that come into play regarding Bernanke’s very public challenge to the Chinese:
1) The entire government will change hands in a month. No one really knows what will happen. A rise in Chinese nationalism is a likely outcome.
2) The economy is slowing at rate that justifies those who have argued for a hard landing. What does it mean if China is growing at sub – 3%? No one knows the answer to that either. China will not take any steps that would hurt its economy anytime soon as a result. Bernanke's challenge to allow the CNY to float higher fell on deaf ears.
3) The Chinese government recently fostered/sanctioned a domestic uprising against Japan. The result was the destruction of Japanese products and factories. The destruction of property has ended. But the evidence shows there has been long-term damage to trade. China inc. is no longer buying Japan inc.
No one has the slightest idea what the implications of this are. If China can turn its citizens against Japan, they probably can do the same to America.
I can understand how some in China would read Bernanke’s words and get a bit miffed. After all, it really is unfair for a manipulator to point fingers at manipulators. I would not be surprised to see an official response from China. A speech, or maybe an editorial would seem likely. Who knows? China could respond with a new tariff on Apple products. Maybe they will just burn down the GM plant.
The timing of Bernanke’s speech is interesting. It could be argued that his monetary saber rattling was occasioned by the IMF confab that was going on, and had nothing to do with domestic politics. Maybe there will be no significant consequences that arise as a result of Ben lighting a match three weeks before the big election. But he lit one; we'll find out soon if there is any dry tinder around.