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Global Imbalances: Bernanke's Journey to the Truth

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In Brief...

Rebalancing The Global Recovery," was significant for many reasons, signifying another change in Bernanke's stance on global imbalances. In a famous 2005 speech, Bernanke blamed imbalances on a "global saving glut. For Bernanke, trade and the current account were "the tail of the dog," where the dog was surplus saving. In 2005, Bernanke thought that we needed to "be patient" and wait for changes to happen "in the long term. They kept their currencies devalued, by recycling their revenues back to the U.S. as capital. U.S. industry and workers became uncompetitive, resulting in an underlying weakness in the economy. The artificially strong dollar and cheap imports made inflation lower than it would otherwise have been. In a 2009 speech, Bernanke regretted his earlier complacency: Bernanke's new position is inconsistent with his "saving glut" theory. Further, given that currency manipulation exists as Bernanke now acknowledges, the saving glut theory requires irrational decisions on where to put savings. China sits right at the heart of this issue, because of its central role in Asian trade. Meanwhile, as Bernanke now acknowledges, the risks keep on growing..

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