Fed Chairman Fears China?: Ben Bernanke Describes Threat of Cash Flow Imbalance Between America and Other Nations, Like China

Ben Bernanke
As if Americans didn't have enough financial problems to worry about -- with high unemployment, foreclosures, and an ongoing credit crunch -- Federal Reserve Chairman Ben Bernanke is sounding the alarm on yet another potential threat to the economy: an imbalance of cash flow between America and foreign nations.

Simply put, Bernanke is worried about global trade and capital flows.

Bernanke sees America's trade deficit with other countries -- China in particular -- as financially dangerous. Even though the Fed Chairman didn't specifically cite China by name, in Bernanke's words "capital flows are once again posing some notable challenges for international macroeconomic and financial stability." Bernanke made his comments in Paris at a Bank of France meeting. Finance ministers and central bankers from G20 countries, which account for about 85% of the world's economic output, are convening for a two-day meeting in France to try to agree on a set of international policy guidelines that would help avoid the kind of financial meltdown that began in the U.S. in 2008 and spread to the rest of the world.


In some ways, his comments echoed previous remarks the Fed Chairman has made about the need to "rebalance" the global economic recovery. Bernanke and some other G20 leaders want to use real exchange rates and currency reserves as a way to measure global economic imbalances. But so far the Chinese have rejected that idea. It's clear that something needs to be done to prevent the kind of recent global financial contagion that hurt consumers, banks, governments and entire countries, including the U.S., Greece, Spain, Ireland, and more.

But for all his talk about international stability and fixing the global economic landscape, I suspect that another source of Bernanke's comments are also his worries about China's growing financial clout and what that means for America's long-term financial standing on the world stage. China is the world's largest capital exporter. In economics lingo, the country is said to run a large "current account surplus." China is not only gaining economic strength, but also political clout because of its vast cash holdings and financial assets. By contrast, the U.S. is struggling with massive debts and a runaway deficit.

Still, U.S. officials have long charged that China boosts it exports by keeping its currency relatively weak, compared with the U.S. dollar. For example, even though China's monthly trade surplus has diminished lately, as recently as October, it still jumped to $27 billion -- more than analysts had expected. With all the cash it has on hand, China has been able, among other things, to throw money into the U.S. -- snatching up everything from stocks and bonds to U.S. real estate and businesses.

Why would it be a problem that China is flooding America with cash? It boils down to three issues:

- A loss of America's economic competitiveness and financial stature in the global marketplace.

- Decreased political clout on the international stage

- A greater risk of the U.S. dollar being eliminated or supplanted by another currency as the world's foremost currency.

There is such diminished faith right now in the U.S. dollar that in places like New York and Los Angeles, you can even open a Chinese bank account and invest in the Chinese currency, known as the yuan or renminbi.

For the longest time, China was the largest holder of U.S. Treasuries, which are often thought of a super-safe investments since they're backed by the full faith and credit of the U.S. government. China holds about $892 billion in U.S. Treasuries.

Recently, however, the Federal Reserve surpassed China as the world's largest holder of Treasuries. Since Bernanke has launched a massive bond-buying program, known as Quantitative Easing 2 (or QE2), the U.S. has been buying its own debt in massive quantities in a bid to keep interest rates low and stabilize the U.S. economy. By the time QE2 ends in June, the Fed will hold roughly $1.6 trillion in U.S. Treasuries. A lot of economists and financial analysts say the U.S. has been forced into this bond-buyng binge -- something that indicates financial weakness.

A lot is at stake, and it remains to be seen how well America will recover from the Great Recession of 2007-2009. But one thing is certain: if America does hang onto super-power status, it might be a title Americans will have to be prepared to share with China.



Lynnette Khalfani-Cox, an award-winning financial news journalist and former Wall Street Journal reporter for CNBC, has been featured in the Washington Post, USA Today, and the New York Times, as well as magazines ranging from Essence and Redbook to Black Enterprise and Smart Money. Check out her New York Times best seller 'Zero Debt: The Ultimate Guide to Financial Freedom.'

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