Bernanke's Global Games

Bernard Bernanke, chairman of the U.S. Federal Reserve, will give a speech at the summit meeting of reserve bankers; it will affect the entire global economy.

Once a year the little town of Jackson Hole, Wyoming, awakens from its slumber when reserve bankers from the world’s major economies are invited to a summit to exchange thoughts on significant developments in the global economy.

That will happen again on Friday. Facing national debt crises, turbulent markets and threatening recession, financial markets nervously await Ben Bernanke’s speech in hopes that he will once again fire up America’s printing presses, offering U.S. securities for sale.

That will make the third time since the collapse of financial markets in September 2008 that the Fed has taken such action due to the still stuttering U.S. economy. Quantitative easing — loose fiscal policy — is the term used to describe this method of intervention. At a time when interest rates are low, the Fed buys huge quantities of U.S. government bonds, paying for them with newly printed money that then flows into the markets. The Fed bought bonds worth roughly $3 trillion during the first two rounds of quantitative easing, known as QE and QE2. QE3 will expand on that fiscal loosening.

But quantitative easing is controversial because its effectiveness is by no means a settled matter. After the first two rounds, critics complain that the U.S. economy grew hardly at all after a brief upward tick. The near 10 percent unemployment rate is at a 30-year high. However, economics Nobel laureate Joseph Stiglitz told the Financial Times that without the looser fiscal policy, the recession would have been far worse, and the unemployment rate would now be near 12.5 percent. Because of that, he feels a third round of QE is necessary.

The entire world will be impacted

The negative effects of such an expansion will mainly be felt by the rest of the world, but not as seriously by the eurozone nations because the European Central Bank is also currently buying up the investments of member nations, thereby keeping the euro’s value relatively low.

It is mainly the developing nations that will bear the brunt of the dollar flood. The more dollars that flood the market, the less valuable the dollar becomes, as is already becoming apparent by the increased costs for raw materials that are paid for in dollars. Burgeoning economies like China and Brazil with an increased demand for those raw materials are already facing massive inflationary pressures.

Nonetheless, Bernanke has already taken a giant step toward loose monetary policy. His announcement that he intended to hold interest rates low for at least the next two years has already begun driving more investors to countries like Switzerland and Norway and particularly toward developing countries. They now groan under the enormous influx of speculative capital, and in the developing countries, speculative bubbles are again already apparent.