The man BRICs need to thank!

Thu, 11 Nov Pre-Open

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There hasn't yet been a poll on the most unpopular man in economics today. But if at all there had to be one, it would have been difficult to beat Mr Ben Bernanke. The current US Fed Chairman is receiving a lot of bad publicity these days on account of his new round of quantitative easing. Emerging nations such as Brazil, China and Russia are worried that the US Fed's actions would seriously hurt the value of the dollar and hence, make exports from emerging markets that much tougher. Amidst such a scenario, it is difficult to find support for Bernanke. However, not only has Bernanke found a supporter but it has come in the form of one of his most trenchant critics. Indeed, Marc Faber has come to the rescue of Ben Bernanke.

As per Moneynews, Faber is of the opinion that emerging nations are wrong in their criticism of Ben Bernanke. This is because he believes that had it not been for Bernanke and his predecessor Greenspan's loose monetary policies, markets like China wouldn't have prospered so much in the past couple of decades. There is certainly some merit in the arguments of Faber. The money that recent US central bankers pumped into the economy found its way into emerging markets like China and helped them invest in capacities, ramp up production and employ people in large numbers. Not only this, the growth in China also helped boost prices of industrial commodities and this in turn helped commodity oriented economies like Brazil and Russia.

Where these nations, predominantly China erred, we believe, is in not making enough efforts to find out whether the trend is sustainable or not. China should have known that growth based on cheap money cannot go on forever and hence, should have taken appropriate steps to reduce its dependence on the US. Failure to do so has resulted into the current state of affairs where China has become extremely vulnerable to any threat to the dollar as well to the US economy.

The US Fed on its part would do well to return to the principles of sound money as soon as possible. This is because while it can continue printing money, it can never quite control the direction of the flow of money. As in the past, the money has continued to flow mostly to emerging markets and precious metals and is threatening to create dangerous asset bubbles there. It is certainly in nobody's interest that not a win-win but a lose-lose policy like this is being pursued by the US Fed.