Bernanke Takes Shot At Chinese Currency Policy, Defends Fed Stimulus

Ben Bernanke did not mention China by name in a speech in Tokyo, but it is hard to read the Federal Reserve chairman’s remarks without getting the sense they were aimed at policies keeping that country’s currency from appreciating too rapidly against the U.S. dollar.
In remarks for a seminar hosted by the Bank of Japan and International Monetary Fund, Bernanke urged policymakers in emerging economies to remove artificial anchors on their currencies. Those efforts, he said, though they have largely come in response to the easy money policies of developed economies in the U.S. and Europe, do not come without costs.
Among those costs are “reduced monetary independence and the consequent susceptibility to imported inflation,” Bernanke said, adding that the “perceived advantages of undervaluation and the problem of unwanted capital inflows must be understood as a package – you can’t have one without the other.”
While emerging market economies including that of China have slowed more recently, they also enjoyed an extended run of impressive growth fueled in large degree by exports to Western countries. To stay competitive on both of those fronts, China has declined to allow for a free-float of its currency against the dollar or euro.
Focusing solely on counteracting the monetary easing by the Fed, European Central Bank and others — including the Fed’s recently-launched QE3 — ignores the “very real benefits,” of such policies, Bernanke said.
He argues that the easing taking place in the U.S. and Europe should support the recovery in those economies, in turn stimulating trade and imports to boost growth in emerging markets that sell goods to those countries.
The problem, of course, comes when easy monetary policy fails to fuel an economic recovery, which appears to be the ongoing case in Europe and could be heading toward a similar fate in the U.S. if the much-feared fiscal cliff causes a significant decline in already-tepid growth.
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