Ben Bernanke

Central Banker for the World

Over the last year, the United States has moved from being downgraded for the first time in its history to now having the American Dollar once again being the global safe haven asset despite economic growth that is slowing and unemployment that is rising.  Just as significant, over that period, Federal Reserve Chairman Ben Bernanke has emerged and established himself as the central banker for the world.
Last August, Standard& Poor’s downgraded the credit rating of the United States.  The Dow Industrial Average fell more than 600 points the next day.  The exchange traded fund for the United States Dollar, PowerShares Market Vector (NYSE: UUP), fell to under $21.  The UUP has risen over the past year to now around $23.  The exchange traded fund for the Dow Jones Industrial Average (NYSE: DIA) has surged, over the same period, from about $107 to more than $130 a share, at present.
Nothing has improved about the United States economy over that period.  Economic growth is anemic, stumbling along at a 1.5 percent rate.  Unemployment just rose to 8.3 percent.  According to the Thompson-Reuters/ University of Michigan survey, consumer confidence for Americans is very low, too.  As consumer spending accounts for about 70 percent of the gross domestic product of the United States, that is a very negative indicator.
But interest rates in the United States are at historic lows as investors from around the world are piling into American dollar-denominated assets.   This is a direct result of Federal Reserve Chairman Ben Bernanke utilizing the powers of his office to revitalize and recapitalize not only the banking system of the United States, but the entire world.
Since mid-2007, the asset sheet of the Federal Reserve has expanded from around $700 billion to over $3 trillion.  For this, funds were not appropriated by the United States Congress, as is required by the American Constitution.  Rather, the Federal Reserve inflated its balance sheet by an accounting mechanism to purchase trillions in assets, including United States and foreign government bonds, mortgage backed securities and other financial instruments from around the world.  Even though the American dollars for this were not appropriated by Congress, this $3 trillion is still the responsibility of the United States taxpayer.
This is not even close to being over, however.  So long as the United States can sell its Treasury bonds at low interest rates, this can be prolonged.  But, as no foreign or domestic investor can be found, the Federal Reserve must now finance the budget deficits of the United States through purchasing about three-quarters of the Treasury bonds being issued.  Maintaining a low interest rate environment until at least 2014 is an imperative for Bernanke.  For this, the Federal Reserve is now the “buyer of last resort” for United States Treasury bonds.
At present, this is working.  The recession in Europe, the continuation of interminable “The Lost Decade” in Japan, and declining economic growth in China has global investors seeking refuge in short term United States Treasury bonds.  While there is always talk about the Swedish krona or Swiss franc functioning as a reserve asset, neither currency has the depth in its capital market formation to even come close to serving as such on a global scale.  This allows for Bernanke to maintain his position has the global central banker with the United States Dollar as the world’s reserve currency.
The true test will be after the November elections in the United States.   The Federal Reserve has taken only modest action this year so as not to influence the presidential election.  When Quantitative Easing 2, a massive economic stimulus program of the Federal Reserve that entailed the purchasing of $700 billion in Treasury Bonds, was initiated it was not until after the November2010 mid-term elections in the United States.   After the American voters go to the polls this November, it will be very significant for the global capital markets and interest rates across the planet to see how much longer Bernanke will reign as the central banker of the world.