BLBG:BOE’s Posen Says Period of Foreign-Currency Reserve Buildup May Be Ending
Bank of England policy maker Adam Posen said the period when Asian and other countries built up foreign-exchange reserves may be ending as middle classes put pressure on governments to justify currency policies.
“That period of reserve accumulation is coming to an end,” Posen said in a speech in London today. “The rise of sizable and politically influential middle classes in the emerging markets increases the pressures on those economies’ governments to be more accountable with their pots of money.”
As China has grown as an economic power, its exchange-rate management has seen it accumulate the world’s largest currency reserves, with holdings at $3.2 trillion as of September. The U.S. has pressured China to let its yuan appreciate against the dollar and end what it says is an unfair export advantage.
Posen, speaking about the world economy over the next 10 to 20 years, said it will “move instead to a time of increased private investment diversification across borders.”
“The relative attractiveness of U.S. and other advanced- country government bonds versus those from emerging markets and from selected multinational corporations is markedly declining,” he said.
The reversal of the traditional pattern of capital flows, where investment shifts to emerging economies from savers in developed markets, is part of a deterioration in U.S. hegemony that’s shifting the global balance of power, Posen said.
The policy maker said global politics over the next two decades will have similarities with the time between 1870 and 1910, which he described as a “multipolar world” with no one economic power dominating.
‘Economic Shift’
“This relative economic shift takes place against the background of the European and U.S. economies having a long way to go to recover from the accumulation of public and private indebtedness over the last decade,” Posen said.
He also said that while some people are “concerned that we are facing a coming period of inflation,” with central banks “actively inflating away government debt,” these concerns are “unfounded.”
“The challenge for monetary policy will be to keep inflation expectations anchored in the face of real rather than nominal volatility,” Posen said. “Inflationary wage-price spirals will be rare, and therefore so will be sustained inflation. In fact, deflation will occur more frequently than in the recent past, if the late 19th Century is precedent.”
To contact the reporters on this story: Jennifer Ryan in London at jryan13@bloomberg.net; Scott Hamilton in London at shamilton8@bloomberg.net
To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net
