Tuesday, December 15, 2009

Bernanke's Saving's Glut Hypothesis. Contradiction Number One.

In March 2005 the Governor of the Federal Reserve in the US, Ben Bernanke, gave a talk on the reasons for the emergence of a global savings glut during the period beginning from the mid 1990s.[1]

He made specific note of the increasing value of the US dollar in the period from 1996 to early 2000. He ascribed this change to “The development and adoption of new technologies and rising productivity in the United States together with the country's long-standing advantages such as low political risk, strong property rights, and a good regulatory environment. These factors, he said, made the U.S. economy exceptionally attractive to international investors during that period.

"Consequently, capital flowed rapidly into the United States, helping to fuel large appreciations in stock prices and in the value of the dollar."

However, economist Robert Brenner, draws attention to the G-3 economies' deliberate manipulations of global currency markets in 1995.
"With the so-called Reverse Plaza Accord of spring-summer 1995, the G-3 economies did a complete about face. By way of the Plaza Accord of 1985, the leading capitalist powers had agreed to drive up the mark and the yen to reverse the devastation of a US manufacturing sector ravaged by the high dollar. Ten years later, they did the opposite, agreeing to push down the mark and yen to revive German and Japanese manufacturing sectors that had been driven into crisis by the low dollar." [2]

So the US dollar was set artificially lower (relative to the Yen and the German mark) in 1985 in order to aid the ailing US domestic manufacturers, according to Robert Brenner. US producers were suffering (with low global demand for their products) as a result of an equally artificial high value of the US dollar that prevailed in the years before 1985.

[Some history: Between 1972 and 1981 the global price of oil increased nine-fold; fueling stagflation. In 1979 Paul Volker from the US Federal Reserve increased global interest rates in order to prop up a resultant ailing US dollar. That's also when the US-dominated World Bank moved to a commitment to global trade liberalization and abandoned its support for public enterprises.[3]

In summary, Bernanke's rationale for the strong US dollar from the years 1996 - 2000 doesn't appear to stand up to historical evidence. If the US benefited from such a profitable investment environment then why didn't that result in a boom in US manufacturing and a resolution of that nation's trade deficit in those years? The opposite, in fact, occurred.

[1] Remarks by Governor Ben S. Bernanke at the Sandridge Lecture, Virginia Association of Economics, Richmond, Virginia
Governor Bernanke presented similar remarks with updated data at the Homer Jones Lecture, St. Louis, Missouri, on April 14, 2005.
March 10, 2005

The Global Saving Glut and the U.S. Current Account Deficit
http://www.federalreserve.gov/boarddocs/speeches/2005/200503102/

[2] STOCK MARKET KEYNESIANISM ….
WHAT IS GOOD FOR GOLDMAN SACHS IS GOOD FOR AMERICA - THE ORIGINS OF THE CURRENT CRISIS. Robert Brenner, Center for Social Theory and Comparative History, UCLA
18 April 2009
This text appears as the Prologue to the Spanish translation of the author’s Economics of Global Turbulence (Verso, 2006) which was published by Akal in May 2009.

[3]'JECOR' was the name of a program instituted by the American power elite to recyle the petro-dollars from the Middle East after the enormous price hikes in this commodity. Petrodollars were used (amongst other things) to hire American firms to industrialise Saudi Arabia with the overall management and fiscal responsibility delegated to the US Department of Treasury. The commission so set up was “independent to the extreme”. Ultimately, it would spend billions of dollars over a period of more than twenty-five years, with virtually no congressional oversight. Because no US funding was involved, Congress had no authority in the matter, despite Treasury’s role. ”

Source: David Holden and Richard Johns, ‘The House of Saud: The Rise and Rule of the Most Powerful Dynasty in the Arab World (New York: Holt Rinehart and Winton, 1981), p359. As quoted in ‘Confessions of an Economic Hitman’ by John Perkins. Page 84. Published by Ebury Press Random House, 20 Vauxhall Bridge Road, London SWIV 2SA. 2005. ISBN 978091909109

4 comments:

Starving Economist said...

I am not sure why you think the trade deficit would decrease if the U.S. enjoyed a good investment environment.

In fact, we should expect the opposite.

Suppose that the rest of the world suddenly realized in 1995 that the U.S. was a great place to invest in. In order to invest in U.S. businesses, foreign citizens would want to purchase U.S. stocks and bonds. To do that, they need dollars, so they purchase them on the foreign exchange market. This bids the dollar up relative to other currencies, which makes foreign goods less expensive to U.S. consumers.

As a result, we will see the current account move further into deficit (as U.S. imports increase) and the capital account moves further into surplus (as the rest of world purchases U.S. stocks and bonds instead of U.S. goods).

Bernanke's story fits all the facts your presented. If you really believe Bernanke is incorrect, you will have to do much much more to demonstrate your point.

Brenda Rosser said...

"If you really believe Bernanke is incorrect, you will have to do much much more to demonstrate your point."

That's why the tail on the head of this entry is 'Contradiction Number One', 'starving economist'.

I'll reply to your other comments later.

Brenda Rosser said...

Starving Economist wrote:"Suppose that the rest of the world suddenly realized in 1995 that the U.S. was a great place to invest in. In order to invest in U.S. businesses, foreign citizens would want to purchase U.S. stocks and bonds. To do that, they need dollars, so they purchase them on the foreign exchange market. This bids the dollar up relative to other currencies, which makes foreign goods less expensive to U.S. consumers. As a result, we will see the current account move further into deficit (as U.S. imports increase) and the capital account moves further into surplus (as the rest of world purchases U.S. stocks and bonds instead of U.S. goods)."

1995 was a very unusual year indeed, for world investors' sentiment to suddenly turn around like that and discover US stocks and bonds were worth buying far more than they were the year before. Inside the US, however, the movement is toward less and less 'saving' and more and more 'consumption' and debt. The New York Stock Exchange Composite Index and the S&P 500 Index began to rise much faster than any rise in US corporate profits. At the same time the real price of housing outstripped any rise in real incomes.

The M1 multiplier, as Karl Deninger points out continues into a 'flat spin'. Increasing amounts of money are needed to have the same stimulative effect on the economy.

Why was the increase in 'investment' in the US limited to stocks and bonds. Why not into manufacturing and export-oriented enterprises?

This is a long story. More in 'contradiction two, three four....'

Jason said...

This 2004 De Long essay may anticipate some things in contradiction two, three, four ...

http://www.j-bradford-delong.net/movable_type/2003_archives/003037.html

Excerpt: Central banks that sought to keep the values of their home currencies down so that their workers could gain valuable experience in exporting manufactures to the post-industrial core, first-world investors who feared sending their money down the income and productivity gap after the crises of Mexico '95, East Asia '97, and Russia '98, techno-enthusiasts chasing the returns of the American technology boom, the third-world rich who thought a large Deutsche Bank account would be a good thing to have in case something went wrong and they suddenly had to flee the country in the rubber boat (or the Learjet)--all of these fueled the flow of money into the United States, which was thus enabled to invest much more than it managed to save. The U.S. economy became, and remains, a giant vacuum cleaner, soaking up all the world's spare investible cash.