11/23/10 Singapore, Singapore – Fed Chairman Bernanke’s speech on Friday was his most important since his “helicopter money” speech of November 2002. In it he conceded the Dollar Standard is flawed. He said, “As currently constituted, the international monetary system has a structural flaw: It lacks a mechanism, market based or otherwise, to induce needed adjustments by surplus countries, which can result in persistent imbalances.”
With that statement, the Fed revealed it has been won over by the logic expressed in my book, The Dollar Crisis (John Wiley & Sons, updated 2005). The first two lines of that book state: “The principal flaw in the post-Bretton Woods international monetary system is its inability to prevent large-scale trade imbalances. The theme of The Dollar Crisis is that those imbalances have destabilized the global economy by creating a worldwide credit bubble.”
Never before has a senior US policymaker admitted that the Dollar Standard is flawed. Former Fed Chairman Greenspan wrote in his autobiography that the trade deficit was far down the list of things the United States needed to worry about. With this speech, the Fed abandoned that position.
By acknowledging this flaw in the Dollar Standard and by focusing on its destabilizing consequences, Bernanke is alerting the world to the most important shift in US trade policy in more than a generation. The inference is clear: Now the flaw has been declared, something will have to be done about it.
The world has been put on notice that the United States will take steps to correct this defect and the destabilizing trade imbalances it permits. If the flaw cannot be corrected through international coordination, then unilateral actions by the United States should be anticipated. These actions would likely include trade tariffs. Tariffs would have a devastating impact on the countries pursuing an export-led growth strategy, particularly China.
The United States last resorted to trade tariffs in 1971 when the Bretton Woods system collapsed. At that time President Nixon imposed a 10% “surcharge” on all imports.
Regards,
Richard Duncan
for The Daily Reckoning
P.S. For a detailed explanation of the flaw in the Dollar Standard and how it resulted in the worst global economic crisis since the Great Depression, please see The Dollar Crisis: Causes, Consequences, Cures.
Richard Duncan
Richard Duncan is author of The Dollar Crisis: Causes, Consequences, Cures, an international bestseller, and The Corruption of Capitalism: A strategy to rebalance the global economy and restore sustainable growth. He began as an equities analyst in Hong Kong, and has since served as global head of investment strategy for ABN AMRO Asset Management, financial sector specialist for the World Bank, and head of equity research for James Capel Securities and Salomon Brothers. He also consulted the IMF in Thailand during the Asia Crisis, and is now chief economist at Blackhorse Asset Management in Singapore.
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