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
There are three
things that Bernanke can do about it: (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.
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.
has produced an inverted yield curve in the United States, which
is the forerunner of a recession.
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.
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
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.
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
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.
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.
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.
of protectionism as a serious possibility. I do not take him seriously
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 for 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.
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.
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.
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
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
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.
WHAT’S THE PROBLEM?
Late in his
speech, Bernanke got to the point: the financial capital markets,
not the physical goods markets.
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.
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.
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.
official concern is with the political reaction of special interests
hurt by free trade.
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.
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.
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.
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.
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
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
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.
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.
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
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
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 monkey wrench into the globalization
shadow boxing with a dying trade union movement. He is officially
ignoring the greatest threats to the problem he 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.
is a sense of unreality about Bernanke’s first Jackson Hole speech.
He gave his listeners what they wanted: cheerleading for government-managed
But he did
not mention the existence of a discontinuous, unexpected, unforeseen,
unmanageable threat to this globalization process.