Clem Sunter

The most powerful man in the world

2011-05-13 15:13

Clem Sunter

He doesn’t carry a gun. In fact, he knows nothing about military matters. He is dapper, always dressed in a suit and tie and has a well-trimmed beard. Quietly spoken, he nevertheless puts his view across with great clarity.

Before I name the individual, let me define the word “powerful”. Being the most powerful man in the world means that you have more influence over more people’s lives than any other man on Earth – for better or worse.

That man is Ben Bernanke, the current chairman of the Federal Reserve of the United States. You might say that Barack Obama as Commander-in-Chief of US Armed Forces, and in particular as the man who can order nuclear strikes, is more powerful. But the fact is that in the interdependent universe that we live in the economy matters more than war: and the difference between Bernanke and Obama in the field of economics is that the former can set monetary policy in America without having to negotiate with other institutions; whereas the President has to co-determine fiscal and other budgetary matters with Congress, one of the houses of which is now controlled by Republicans.

With the resulting paralysis between the two arms of government over what to do with taxes and expenditure, the future fate of America rests primarily on one man’s shoulders – Mr Bernanke. Moreover, because US GDP is still 25% of the global GDP, if America prospers, the rest of the world prospers; but if America has another crash, so will the rest of the world. And that will affect everybody’s pocket, including our own pockets in South Africa.

To see what’s at stake, you only have to go back to the previous chairman of the Fed, Alan Greenspan, and see what happened when he got it wrong. When the dot-com bubble burst at the beginning of this century, he immediately reduced interest rates to soften the blow. This led to sub-prime variable rate mortgages being granted to borrowers who could not possibly repay them. When interest rates rebounded - as they inevitably had to do - the defaults went through the roof, property prices dived, banks which governments chose not to bail out went bust and the world economy went into recession.

What’s different now? Bernanke has zeroed interest rates to stimulate recovery and indulged in quantitative easing by making the Fed buy back US treasury bonds, thus increasing money supply. If he has got the balance right, the US economy will gradually recover and inflation will stay reasonably low. However, if he has overcooked the monetary brew, inflation will go back to levels last seen in the 1980s, interest rates on US government bonds will equate to those in Greece and Portugal and central banks around the world will start showing enormous losses on their holdings of US treasuries.

Whereas the first financial crisis this century was related to commercial banks, the second one will centre on central banks with much more devastating consequences. Hence Bernanke’s wisdom and judgement can affect billions of people in a way that nobody else can. Get down on your knees and pray for him!

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