OSAKA – Janet Yellen is just 152 cm tall and looks like a sweet old lady. How looks can be deceptive. She has just taken over as the head of the U.S. Federal Reserve System, making her the most powerful woman in the world.
Time magazine called her the “16 trillion dollar woman” referring to the size of the U.S. economy, but as the events of the last few weeks have shown, she might more correctly be called the “88 trillion dollar woman,” that being a rough calculation of the value of total gross world product, the annual value of goods and services produced worldwide, on a purchasing power parity basis. (In current dollars, the figure is lower, about $75 trillion.)
The question of the hour for Yellen, who took over this month from Ben Bernanke as the first woman head of the U.S. Federal Reserve System in its 100-year history, is whether she will accept that she has a responsibility to the global economy as well as to the United States.
The potential tragedy for the world — and ultimately for the U.S. itself — is that she will follow her predecessors and those constitutional experts who say that the duty of the Fed is to look narrowly to the U.S. and the twin preoccupations enjoined on it of keeping inflation in check and promoting employment in the U.S. — and the rest of the world can go hang.
That is more or less what commentators from Bloomberg and other more learned economic talking shops have said in the last few weeks.
The realeconomik, as seen in the financial markets in these last few weeks, is that we live in a globalizing world. The U.S., like imperial powers before it, likes to have everything its own way: It claims global sway without taking responsibility for its action; when it does something for its own benefit it is prone to pretend that its actions have no consequences on the rest of the world, or that it is their own fault if they are caught in the backwash.
But the damage that its policies do to others will come back to hurt it too. That’s the lesson Yellen should seize.
This has been seen in the last few weeks as the U.S. has begun to “taper” or reduce the massive program of quantitative easing or QE, amounting to $85 billion a month being pumped into the economy, a flood of money intended to encourage economic growth and create new jobs.
To what extent it has done so in the U.S. is a matter of argument, with critics complaining that it has merely boosted asset prices and the stock market to the great speculative benefit of the super-rich and mega-rich, with the lion’s share of the gains going to the richest 1 percent, 0.1 percent and 0.01 percent. The U.S. jobless rate has fallen slowly, but so has the participation rate of employed people, because many long-term unemployed have just stopped looking for work.
The U.S. QE, supported by similar easing in Japan and the U.K., has certainly boosted stock markets. It also encouraged money to flow to the emerging markets, as the rapidly growing developing countries are called. The problem now is that the U.S. action in cutting back on the flood of money has made investors scared and they are pulling back, especially from the emerging markets, with devastating effect.
Raghuram Rajan, formerly chief economist of the International Monetary Fund (IMF), who now heads the Reserve Bank of India, sounded the alarm bells last week, just before the financial markets were rocked by a second wave of turmoil.
The first wave hit last year when Bernanke first talked of tapering and emerging markets were hit when money was pulled back. As the Fed started its tapering and cut back the monthly drug infusion from $85 billion to a mere $75 billion a month, late January saw more than $6.3 billion pulled out of leading emerging markets in a week. Brazil, India, South Africa and Turkey all felt the pain. Turkey raised its weekly benchmark rate from 4.5 to 10 percent, but after a few hours of relief, currencies of the emerging markets came under renewed pressure.
By the end of January a nervous contagion had spread back to the developed markets, and stocks in the U.S., U.K., Europe and Japan all posted sharp losses for January, the first time it has happened since 2010. The investment bank Goldman Sachs produced a note claiming that the impact of a shock to emerging markets should have limited effect on the economies of rich countries. Yet there is always the risk of financial panic spreading literally like wildfire and burning the industrialized world on its way.
It is worth listening to the complaints of India’s Rajan, not least because he recognizes that there is blame to be spread and shared all round. In his interview with Bloomberg, he claimed that: “Emerging markets were hurt by the easy money which flowed into their economies and made it easier to forget about the necessary reforms that had to be taken, on top of the fact that emerging markets tried to support global growth by huge fiscal and monetary surplus. This easy money overlaid the already strong fiscal stimulus from these countries, and made it difficult to make the necessary adjustments.
“The industrial countries at this point said, ‘What do you want us to do? We have weak economies, so we’ll do whatever we need to do. Let the money flow.’ Now when they are withdrawing that money, they are saying, ‘You complained when it went in. Why should you complain when it went out?’ We complain for the same reason when it goes out as when it went in: It distorts our economies, and the money coming in made it more difficult for us to do the adjustment we need for the sustainable growth and to prepare for the money going out.
“International monetary cooperation has broken down. Industrial countries have a part to play in restoring that, and they can’t wash their hands and say, ‘We’ll do what we need to and you do the adjustment.’ …
“Fortunately the IMF has stopped giving this as its mantra, but you hear from industrial countries that ‘We’ll do what we have to do, the markets will adjust, and you can decide what you want to do.’ “
Rajan made his plea: “We need better cooperation, and unfortunately that’s not been forthcoming so far.”
Enter the $88 trillion woman. Will she make a difference? We wait to see whether she has any inkling of the international pain that American policies are causing and whether she has any idea how to start a dialogue with Rajan. There is no sign yet that she does — in which case we could all be in for a bumpy economic ride, ultimately even including the mighty U.S.
Kevin Rafferty is a professor at the Institute for Academic Initiatives at Osaka University. He served on the World Bank staff in Washington from 1997 to 1999.