Ben Bernanke is a smart man…and an idiot. Yesterday, the smart man spoke to a crowd in Berlin and delivered such a clear-headed, honest appraisal of the world financial situation, we’re surprised it was not followed by a stock market crash.
Bernanke pointed out that the great boom has been largely a result of saving done by oil producers and Asian exporters. He did not explain it, but this money freed Americans from the need to save any money themselves. Instead, they just borrowed from overseas savers – while their own money was used for consumption. Nor did he describe the real, long-term consequences of this division of financial labour: Foreigners become rich producers and savers; Americans (along with many of their Anglo-Saxon cousins in Britain and Australia) become poor consumers and debtors.
What he did explain was that this easy money is probably going to dry up “over the next few decades” as oil exporting countries and Asian manufacturing countries begin to consume more of their own output. China, for example, is almost certain to save less and spend more in the years ahead. Inevitably this will mean pressure on Americans to save more themselves…and consume less. It will also mean higher real interest rates in the United States, a lower-value dollar, and lower US asset prices.
Two years ago the idiot Bernanke spoke and noticed the same phenomenon. But then, he referred to it as a “global savings glut” and encouraged the fantasy that Americans were doing the savers a big favour by taking their money. He made it seem like such a benign and salutary exchange. They do the saving…we’ll do the spending. They do the producing…we’ll do the consuming. “They sweat,” said one financial pundit; “we think.”
The conceit of it had about the same effect upon American investors and consumers as finding an over-turned liquor truck in the street. Soon, they were helping themselves to armloads of bottles – and the party was on!
“We are so clever, we no longer have to do the hard work,” they told themselves. “We are such geniuses; we no longer have to save. We are so ‘inventive’…we are so ‘creative’…we have the most ‘dynamic economy’ and the most ‘flexible’ markets. Hey, let’s face it – we’re just smarter than everyone else.”
But now, the cops are on the scene and people are throwing up in the bushes. “The party is over,” says the Financial Times . And the Fed is said to be considering a cut in its benchmark rate at its meeting next week – just as we predicted. American subprime borrowers (and lenders) no longer look like geniuses. Instead, they look like the yahoos they always were. Suddenly, many of the biggest players on Wall Street and in Greenwich don’t look so smart. And the Europeans pat themselves on the back – “See…Americans are morons,” they tell each other. “Just like we thought.”
Markets and Money