Federal Reserve Chairman Ben S. Bernanke is prescribing “poison” to the U.S. economy by keeping interest rates near zero and fueling a wave of speculative capital that may cause the next global crisis, former Morgan Stanley chief Asian economist Andy Xie said.
Bernanke is making decisions based on “marginal considerations” that will help short-term growth and employment, instead of focusing on the “soundness of the system,” Xie wrote in an e-mailed note today. The next worldwide crisis will probably strike in 2012, driven by inflation as the low cost of borrowing spurs increases in asset prices, he said.
“There is a Chinese saying that one could quench the thirst by drinking poison,” said Xie, who predicted in September 2006 that the U.S. economy would fall into a recession in 2008. “Bernanke seems to be prescribing exactly this to the U.S. economy. The slower Bernanke raises interest rates, the bigger the next crisis.”
Bernanke, a scholar of the Great Depression, has overseen a record injection of liquidity into the world’s largest economy, pledging not to make the mistake of the 1930s, when officials tightened policy. The Fed chairman yesterday said that the U.S. economy faces “formidable headwinds” including a weak labor market and tight credit that are likely to produce a “moderate” pace of expansion.
Emergency Measures
“We’ve got to figure out a way to get out of these post- bubble emergency actions a lot more effectively,” Morgan Stanley Asia Chairman Stephen Roach said in an interview with Bloomberg Television in Hong Kong today. “I worry that Ben Bernanke, while he says one thing, will do another.”
Inflation in the U.S. remained “subdued” and interest rates are likely to remain low for an “extended period,” Bernanke told the Economic Club of Washington.
Policy makers around the world cut interest rates and boosted government spending by more than $2 trillion as part of emergency steps to counter the global recession. The Japanese government today unveiled a 7.2 trillion yen ($81 billion) economic stimulus package amid signs the recovery and Prime Minister Yukio Hatoyama’s popularity are waning.
Fiscal stimulus worldwide restored stability “temporarily” and may be inflationary, said Xie, now an independent economist. Asset-price increases are also making a “significant contribution” to global growth, mostly in emerging economies, and industries such as property, automobiles and commodities, he said.
‘Too Expensive’
“The policy consensus to prop up the global economy with stimulus will continue until inflation takes off or governments are broke,” Xie said. “This strategy is too expensive to last.”
Inflation will likely become apparent in 2011, and a “vicious wage-price spiral” could take place the year after, Xie said. He said the lag between money creation, which happened last year, and inflation may take more than 18 months.
Asian policy makers are already studying capital controls to limit “hot money” inflows that may stoke asset bubbles and force their currencies to appreciate.
“Inflation would scare central banks into tightening dramatically in 2012, which would pop the current asset bubble,” Xie wrote. “By then the global problem would be more serious than now. In addition to the leverage problem in the household and financial sectors, the government sector would also be hugely levered then.”
The trillions of dollars that governments are spending is “buying some time,” Xie said. One of the risks is that governments may not have enough money to “cushion the pain during the coming economic restructuring,” the economist wrote.
“The whole world is drinking poison to quench the thirst,” Xie said. “It may feel like relief now. The sickness will strike in 2012.”
