Imagine what the world’s monetary policy would be if the People’s Bank of
China, rather than the US Federal Reserve, set the global agenda.
Then the number one goal would not be to help an already rich country recover
from a hangover caused by a binge of housebuilding and borrowing. Instead,
it would be to push commodity prices down towards the cost of production.
The current commodity boom increases the risk of both social unrest and an
inflationary spiral in China, where food and fuel account for almost half of
consumer spending.
Tighter policy
Somewhat tighter policy – higher real interest rates around the world, perhaps
supplemented by controls on speculative lending – would reduce commodity
buyers’ spending power without discouraging helpful investments. That would
be a change. Real interest rates are now negative in countries accounting
for two-thirds of world gross domestic product.
There would be another big policy shift if the monetary world were less
oriented to American concerns and ideology. In the current regime, free
cross-border capital flows and floating exchange rates are both considered
desirable. But neither type of financial flexibility really suits relatively
poor countries with high savings rates.
Global sway
From the PBoC’s perspective, fair exchange rates and restraints on
cross-border excess would be targets of monetary policy, along with low
inflation and sustainable growth.
The Fed-led monetary regime is not going away anytime soon. US GDP is still
2.5 times larger than China’s, the renminbi has almost no cross-border clout
and the PBoC has less authority inside China than the Fed does in the US.
But Ben Bernanke should relish the global attention his first press conference
receives. His successors at the Fed will have much less global sway.
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