In this breakout from the webinar, Jim talks about his recent conversation with Ben Bernanke at a conference in South Korea where both were invited to speak recently. I put a few key points in bold type. I have a few added comments at the end of this post.
------------------------------------------------------------------------------------------JW: Speaking of the Fed, you were recently invited to a financial conference in Seoul as one of two keynote speakers. The other keynote speaker with you was former Federal Reserve Chairman Ben Bernanke. That’s quite some invitation. I understand you had the opportunity to engage Mr. Bernanke in an extended private conversation. Tell us about that encounter and what you gleaned from it.
JR: We were in Seoul, South Korea. It was a large conference, but we were the only two keynote speakers along with a couple of other panelists. They had a VIP reception for about ten of us including me, the former Chairman, and the VIPs of the Korean banking establishment. There was the head of the Korean Stock Exchange, one officer from the Korean Central Bank, and the head Korean securities regulator. Chairman Bernanke and I were the only Americans.
We had a nice chat and actually had a few laughs. I was one of a group of people who had helped to organize and set up the Center for Financial Economics at Johns Hopkins University. We worked hard to get an absolutely first-rate director, which we did, and no sooner did we get our director than Bernanke called him up and hired him away to come work at the Fed to be head of communications for a couple of years. I tease my friend and call him the Minister of Propaganda, because he’s the guy who was writing all these forward guidance statements that people were pulling their hair out over. I accused the Chairman of picking off our guy. He said, “Well, we didn’t pick him off. We just borrowed him. We gave him back,” which is true because our Director is back at the center, I’m glad to say.
Mr. Bernanke was very kind. I had a copy of his book with me and asked him to inscribe it, which he did very nicely. As an author myself, I know that whenever anyone asks you to sign a book, you always do it in a heartbeat. You never turn it down. He was very kind to sign the book.
He said a number of interesting things one of which was very striking to me. When talking about a rate increase, because that’s all anybody wants to talk about, he used the phrase, “The rate increase, when it comes, will be good news for the U.S. economy because it means growth is getting stronger.”
That’s a perfectly sensible thing to say. This idea that you raise rates and that makes the economy stronger is exactly backwards. The way it works is the economy gets stronger and then you raise rates. In other words, the Fed always follows the market, it doesn’t lead the market. There’s almost this magical or mystical belief that if Janet Yellen raises interest rates, it must mean everything’s all good. It doesn’t mean that all. In fact, if she raises rates in a weak economy, it would be a disaster. We’d have a meltdown.
What Bernanke said did make sense. He said, “The rate increase, when it comes, will be good news because it means the economy in getting stronger.” But then you have to look at the data, which is really weak. By saying “when it comes,” it told me that he wasn’t expecting it anytime soon. In other words, he was conditioning it on economic growth but didn’t suggest at all September, December, this year or any particular time, and he clearly conditioned it on stronger growth, which there is no sign of.
I thought he pulled the rug out from under Janet Yellen. Janet Yellen is trying to have it both ways. She’s trying to get out there, put on a brave face, and talk every day about raising rates later this year. All the headline writers and reporters run right out and write a headline: “Janet Yellen Says We’re Going to Raise Rates This Year.” Forget the headlines. If you actually read the speeches or listen to the testament and look at what she says, it’s always conditioned on stronger growth and economic conditions meeting her forecast. The forecast is three parts: lower unemployment, higher inflation, and stronger growth.
We’re not getting to any three of the levels that she specified in her May 22nd Providence speech. I read an interesting speech she did last Friday in Cleveland, and I found the May 22nd Providence speech to be a lot more specific about the numeric goals she’s looking at. I think she really told us what her playbook is. Based on that, we’re not getting close to any of them, so I don’t see a rate increase. That was consistent with what Bernanke said, and I agree with the former Chairman. People who are expecting Janet Yellen to raise rates are not listening carefully enough to what she’s truly saying.
Another interesting thing he expressed was when he talked about the international monetary system. Now we’re talking about IMF, currency wars, Special Drawing Rights (SDR), and all the things I spend a lot of time researching and writing and talking about. It’s a little unusual for the Fed Chairman to be immersed in that because that’s really the job of the Treasury.
The Treasury Secretary is supposed to be worried about the international standing of the U.S. dollar, and the Fed is supposed to worry about domestic monetary policy. The Fed’s not supposed to have a big footprint in the international monetary system, yet he told me that he was involved working with the IMF to restructure Chinese participation in the voting rights of the IMF.
I was a little surprised at that. He’s clearly competent to do that, but to see the Chairman of the Fed working hand-in-glove with the IMF and the Secretary of the Treasury on Chinese voting rights in the IMF was a little bit unusual. I thought, “Gee, you’re really out of the Fed’s comfort zone.” Then he went on to say that the international monetary system is incoherent. That was his exact word – “incoherent” – which I agree with. It is incoherent. It’s a mess. About ten days later I was in the United States down in Washington and had a conversation with John Lipsky. John is the former Director of the IMF. In a separate conversation, he used the exact same word. He said. “The international monetary system is incoherent.”
I don’t think Bernanke and Lipsky were coordinating their remarks, certainly not to me, but I did find it striking that the former Chairman of the Fed and the former head of the IMF both used the exact same word to describe what’s going on, specifically “incoherent,” which tells me that’s it’s in the air. The elites – the people who really run the global monetary system – are on the same page. We’re going to need new rules to the game, new rules to the playbook for the international monetary system, starting in the fall with the inclusion of the Chinese yuan in the SDR. I think we can all see that coming. They may go beyond not only changing Chinese voting rights, but also maybe issuing some SDRs. We have to watch that.
We’re halfway back to Bretton Woods. We have an informal peg right now going on between the Chinese yuan and the U.S. dollar, around 6.2 to 1. That’s been very stable. The Chinese are not playing the currency war card as they did from 2006 to 2014. They’re on their best behavior hoping to join this exclusive SDR club. I’ll certainly watch that very closely.
It was an interesting conversation, and I’ll briefly mention a third thing Bernanke was very candid about. He used the word “experiment” repeatedly. In other words, he said that what they and the Fed did with monetary policy from 2007 to early 2014 when he left was an experiment, which means they didn’t really know what they were doing. They were just trying stuff. He talked about FDR, Franklin Delano Roosevelt, and what was a very popular term in the ‘30s during the Great Depression. The New Deal was a government-instituted series of experimental projects and programs. “We were just going to experiment to see what worked.”
The thought crossed my mind that most experiments actually fail, and I was hoping that he hadn’t blown up the laboratory in the process. The jury is still out on the success of his time at the head of the Fed, but he was candid about the fact that they don’t really know what they’re doing.
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My added comments:
Perhaps the most significant information in the entire webinar are the comments I put in bold above about the international monetary system being "incoherent". If you have been reading this blog you are not surprised by those remarks. We have published numerous blog articles quoting key figures in the international monetary system talking about "blind spots" in the system and calling for "new rules of the game". The call for "new rules of the game" is a call for major monetary system change.
Since that is what this blog is all about, these are all very significant comments. Right now it seems the monetary system might go in one of two directions in the future. It might become more centralized and coordinated with the IMF becoming a much more influential organization or it might break down and become more decentralized. In a complex system, no one can be sure what will happen.
The first step towards decentralization might be a full scale abandonment by the BRICS nations of the IMF and the World Bank. We are nowhere near that happening right now, but this fall it will be important to see what happens with the IMF decision on the Yuan entering the SDR currency basket. It is a signal as to which way things are going. The odds favor inclusion of the Yuan right now.
We will cover it here and see what actually does happen and how it might impact us in our daily lives.
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