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

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

Tuesday, December 15, 2009. Brenda Rosser

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.]

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 conomics of Global Turbulence (Verso, 2006) which was published by Akal in May 2009.

Labels: 1995, Bernanke, global savings glut, Reverse Plaza Accord, trade deficit

Bernanke’s Saving’s Glut Hypothesis – Contradiction Number Two.
Brenda Rosser. Wednesday, December 23rd, 2009

[Continued from ‘Bernanke’s Saving’s Glut Hypothesis. Contradiction Number One’

http://econospeak.blogspot.com/2009/12/bernankes-savings-glut-hypothesis.html]

In his March 2005 musings [1] on the reasons for a so-called global savings glut Ben Bernanke asserted that the US current account deficit was, by definition, “the excess of U.S. payments to foreigners over payments received in a given period.”

Thus the entire official meaning of ‘current account deficit’ hinges on the US Federal Reserve’s definition of what a ‘foreigner’ is. And what is a ‘foreigner’? Today most world ‘trade’ is dominated by giant transnational corporations (TNCs) who exchange goods, services and money within themselves and/or network with other TNCs. [2] The vast majority of these giant conglomerates are of US in origin. What that effectively means is that the US controls most global ‘trade’[3].

“According to the Forbes Magazine’s ranking of 2007, the first five largest corporations of all times are not industrial but financial institutions.”

It is no coincidence that four out of five of these were from the US. [4]

A single US corporation, Walmart is China’s fifth-largest export market, ahead of Germany and Britain [5] and “Wal-Mart is responsible for approximately 10 percent of the United States’ trade deficit with China.” [6], [7]

In fact, a new international system has emerged since the 2nd world war. It is unipolar and hierarchical. It is empire. “The United States has become the global ‘world state’ or ‘world power’ to which there is no challenger. There are now “extremely high levels of economic and financial integration” that “motivate cooperation especially in trade….[The US] “sets its own legal and moral standards admitting to no external sources of authority.” [8], [9]

There is incontrovertible evidence that the US has come to its own unique definition of what is ‘foreign’ in its trading accounts with the rest of the world. As explained above, US companies dominate world commercial exchanges and transact with each other across national boundaries. Much of this trade is unrecorded in that the money transactions that do occur are often understated. The strong trend is for these large firms’ accounting statistics to be designed to actually ‘create’ losses in order to avoid taxation.[10]

The establishment of a myriad of shell companies using offshore tax havens often makes it impossible to trace or measure the proceeds of international transactions. Further, up until early in 2008 the US Treasury’s definition of the words ‘foreign and ‘domestic’ was based on where the commercial entity was “created or organised”. In May 2008 the definition of ‘domestic’ was changed. The purpose of this move was to exclude from ‘domestic’ those entities ‘created or organised’ outside of the US and who also had ‘substantial foreign ownership’. [11] But the dubious definition of ‘foreign’ remained.

So where are we headed with this creeping loss of meaning. Despite a reigning US President now wearing Democrat robes ‘preferred nomenclature’ remains the order of the day. In Reagan’s time, just as it is at present, nations that are to be rolled back have governments that are called ‘terrorist’. Countries that are to be supported against unwanted insurgencies are still called ‘democratic’. But in things financial we now have a cleverer and more constant application of propaganda. We can see that money and goods that never change hands is now considered ‘trade’.

“Let us begin by committing ourselves to the truth, to see it like it is and to tell it like it is, to find the truth, to speak the truth and live with the truth.”

Richard Nixon’s nomination acceptance speech, Miami, August 8th 1968

[1] The Global Saving Glut and the U.S. Current Account Deficit

http://www.federalreserve.gov/boarddocs/speeches/2005/200503102/

[2] It’s NOT international trade. Don’t be fooled.

Brenda Rosser. Thursday 24th July 2008

http://econospeak.blogspot.com/2008/07/its-not-international-trade-dont-be.html

[3] The term ‘trade’ itself is open to question when a vast quantity of exchanges happen within the same global corporation or network of such companies.

[4] These corporations are: Citigroup, Bank of America, JP Morgan Chase, American International Group. HSBC Holdings is the other, a U.K. bank with approximate assets of $ 1.6 trillion.

From: ‘Finance-Military Complex’

http://democracyandsocialism.com/Articles/FinanceMilitaryComplex.html

[5] The Economic Crisis: A Wal-Mart Economy Dimension. Michael Perelman. Econospeak 18th October 2008

[6] Wal-Mart’s ‘China Price’ By Joshua Holland, AlterNet. Posted November 7, 2005.

http://www.alternet.org/workplace/27829

[7] A board member of the Reserve Bank of Australia – Roger Corbett – is a Member of the Board of Directors of Wal-Mart Stores, Inc as well as Fairfax Media Limited (one of Australia’s oligopoly media empires). He is also Deputy Chairman, Non-Executive Director of PrimeAg, a corporation established in December 2007 and that has set its sights on a massive land and water grab in Australia using a lot of investor money from overseas.

[8] ‘Towards a Hierarchical International System? THIS Network.Department of Political Science and International Relations, University of Tampere, Finland. Working Papers 1/2005

[9] The trillion-dollar TARP bailout of large US financial corporations in 2008 displayed the readiness of America to abandon the austerity programs and principles it imposed on other countries (nations suffering from large current accounts, trading deficits and insolvent trading institutions just like America) when it suited.

[10] See the large number of online discussions relating to the practice of ‘transfer pricing’ in exchanges within and between TNCs.

[11] CFIUS Review of Foreign Investment: U.S. Treasury Department Proposes New Regulations to Govern National Security Review of Foreign Investment in the United States

Sullivan & Cromwell LLP – May 8, 2008

http://www.sullcrom.com/publications/detail.aspx?pub=444