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 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.

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.


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.


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 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.

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.


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.


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 in 1998.

Greenspan 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 monkey wrench into the globalization process.


Bernanke is 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.

There 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.

August30, 2006

Gary North [send him mail] is the author of Mises on Money. Visit He is also the author of a free 17-volume series, An Economic Commentary on the Bible.

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