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Tuesday, February 27, 2024
WASHINGTON, Jul 18 2007 (IPS) - U.S. Federal Reserve Chairman Ben Bernanke told the U.S. Congress Wednesday that the global economy was growing at a strong pace bolstered by rising consumerism and demand, but the U.S. trade deficit with the world remained at a high level despite a sliding dollar.
In his Monetary Policy Report submitted to Congress Wednesday, Bernake said that since the beginning of 2007, the U.S. dollar has declined by about three and a half percent.
He said the dollar has depreciated 10 percent against the Canadian dollar and roughly three and a half percent against the euro and pound sterling. In contrast, it has appreciated about two and half percent against the yen.
He also said that the U.S. dollar has depreciated three percent against the Chinese renminbi since the beginning of the year, and that the pace of change in the renminbi-dollar rate has accelerated somewhat over the past two and a half months.
Many U.S. lawmakers blame what they say is an artificially low Chinese currency for the nation’s huge trade deficit with China.
The trade gap with China increased to 20 billion dollars in May, up from 19.4 billion dollars in April. China says that half of its trade surplus in June was because of exports to the United States. U.S. data released last week also showed that the U.S. trade deficit with China widened to 96 billion dollars for the year – a 15 percent year-to-date increase over 2006.
But Bernanke appeared to contradict the widely held view in Congress that the U.S. trade deficit with China was solely because of the cheap Chinese exports that are attractive for U.S. consumers.
When asked why the U.S. trade deficit didn’t improve even when the dollar has been getting cheaper, he said that changes in the value of the dollar or Chinese renminbi would not be enough in themselves to deal with the deficit.
He said that better savings in the United States combined with the encouraging more consumption in China would be better solutions.
“Supported by solid economic growth abroad, U.S. exports should expand further in coming quarters,” Bernanke told a House Finance Committee hearing. “Nonetheless, our trade deficit – which was about 5-1/4 percent of nominal gross domestic product (GDP) in the first quarter – is likely to remain high.”
He added that not allowing the Chinese currency to float was also harmful to the Chinese economy, citing the risk of inflation.
“I do think that it is in China’s interest to allow their currency to float, to appreciate,” he said, adding that controlling the exchange rate “distorts the economy and puts more resources into the export sector.”
Unlike the traditional advice from Washington to developing nations of exporting more goods to fix their economic woes, he said that China needs to produce more for its local market.
“They need to reorient their economy to produce more for the domestic market and be less oriented to the external market and changing the value of the currency is one step to doing that,” he told Congress.
Bernanke’s report warned of inflation risks in China based on its robust economic activity in the first quarter of 2007.
Since late 2006, inflation in China has increased – reaching a rate of three and half percent over the 12 months ending in May – largely because of higher food prices.
Continuing rapid growth of aggregate demand and liquidity pressures from the accumulation of foreign exchange reserves have raised concerns about broader, more-sustained upward pressures on inflation.
The report said growth was supported by a surge in exports and a pickup in fixed investment, which had slowed somewhat in the second half of 2006.
The strength of exports has resulted in a ballooning of the Chinese trade surplus.
The report described a strong economic activity across the globe. Bernanke said that Canada, the European Union, Japan, and Britain all posted above-trend growth rates in the first quarter.
Output also accelerated in emerging markets in Asia, led by China, and growth in Mexico appears to be picking up again after a lull in the first quarter.
He said that inflation pressures were increasing in many parts of the world because of rising energy prices that boosted consumer prices. These also led to sometimes substantial increases in food prices that contributed to inflation pressures.
On global stock markets, the report said that concerns about the U.S. subprime-mortgage market, which generally lends to home buyers with weak creditworthiness, has caused some jitters in most major global equity indexes during June and July but were generally little changed over this period.
On balance, equity indexes in the major foreign industrial countries have increased between five percent and 12 percent in local-currency terms since the beginning of 2007, Bernanke said.
The Shanghai composite index is up more than 45 percent this year after a remarkable increase of about 130 percent last year.
Leading equity indexes in other emerging Asian economies and in Latin America have also posted sizable gains in the range of 10 percent to 35 percent so far this year, the report said.
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