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Tuesday, March 21, 2006

Bernanke Soaks Up The Pressure

Well everyone is of course putting Ben Bernanke under the microscope for scrutiny. My fear is that he may end up having to try to appear more of an interest rates hawk than he actually is, just to keep people happy. Luckily this doesn't seem to be causing any great problems at the moment, and since luck is the better part of art, let's just hope he stays lucky and the US economy resists.

Actually I suspect it will, but I need to give more thought to why I think this. The unprecedented run up the ramp in China and India are obviously part of the story, since they create conditions where the whole global economy grows at a healthy clip. Even perpetual sick-men like Japan and Germany almost look as if they have been rejuvanated, although I fear that all that has happened has been some very costly and professional cosmetic surgery. Age will out,in the end.

Back to Bernanke for a second though. Those who are interested in Bernanke 'nuances' in relation to the 'savings glut' thesis, will find more grist for the mill today, as he is even more precise in his wording:

But, drawing on his past speeches on the “global savings glut”, Mr Bernanke said low long-term rates also reflected low levels of intended investment in the global economy relative to savings. Sluggish domestic demand growth outside the US, and in turn weak demand for US exports, was holding down global interest rates, resulting in a lower federal funds rate than would otherwise be needed, he said.

So please note, it is "low levels of intended investment in the global economy relative to savings" which is the point. Personally I have always been convinced that this is what he has been saying, since I don't know how anyone could imagine that someone who knows as much economics as he does could be saying anything else.

The following little snippet is, incidentally, only the same point put another way:

"Mr Bernanke said low long-term rates were in part the result of a decline in the “term premium” investors demand for holding longer-dated securities."

So the big question behind all these interconnected phenomena is why? Aha! That is the hard part.

Anyway, one good point that I am already feeling about Bernanke is that he not only has a good grasp of basic theory, he also isn't scared of getting his hands dirty trying to apply it, and he does seem to have some sort of good intuitive feel for how things work. He also seems pragmatic and willing to adapt theory to life. So all of this basically augurs well. I wish we had such people here in Europe (well, maybe, just maybe, Mervyn King).