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Richmans' Trade and Taxes Blog
Bernanke has learned what Richard Duncan explained in 2005
In his 2005 book, Duncan had predicted the Great Recession that began in 2008. Duncan understood that the trade-deficit countries, especially the United States, would not be able to continue purchasing more and more imports without the income that would come from exports. Countries can only borrow so much from abroad to buy imports until they experience financial crises.
But when the Great Recession hit in October 2008, American economic leaders thought that the U.S. economy could be fixed by shoveling debt from the private sector to the public sector and through fiscal and monetary stimuli. It has been two years now and, as Bernanke noted in his speech pointing to the data graphed below, “As you can see, generally speaking, output in the advanced economies has not returned to the levels prevailing before the crisis, and real GDP in these economies remains far below the levels implied by pre-crisis trends.”
Why aren't the Advanced Economies Recovering?
According to Bernanke, one of the reasons why the United States and the other advanced economies are not recovering is that many emerging countries are manipulating the exchange rate of their currencies. Bernanke said:
Bernanke noted that those emerging market countries who manipulate their currencies are gaining a competitive advantage over those who do not:
Who are the Currency Manipulators?
The following chart regraphs the data from one of Bernanke's tables. It shows the foreign exchange reserves accumulated by each of the emerging market countries from September 2009 to September 2010, as a percentage of that country's GDP:
What Will Bernanke Recommend?
Bernanke understands that the currency manipulating countries are keeping the advanced countries from recovery and that they are gaining a competitive advantage over those emerging market countries that do not manipulate their currencies. Richard Duncan thinks that Bernanke will soon advocate tariffs:
When Bernanke is ready to recommend a solution, the scaled tariff could be his best option. Since it would only be applied to currency manipulating countries, it would give countries that play by the international rules (Chile, India and Turkey in the above graph) an advantage in American markets.
Moreover, since its rate goes up when our trade deficit with a currency manipulator goes up, down when our trade deficit goes down, and disappears when our trade deficit with that country disapppears, it would force China and the other currency manipulators to buy more of our products, which would stimulate our economic recovery.
The 2008 crisis demonstrated that imbalanced trade is not sustainable. In contrast, balanced trade can grow forever. If the United States were to enact the WTO-legal scaled tariff, other trade deficit countries would soon follow suit. The result would balance trade worldwide.
Journal of Economic Literature:
Atlantic Economic Journal: