Sampling Bernanke's and Geithner's Latest Grilling

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Tony Crescenzi, Miller Tabak

The Wall Street Journal highlighted [on Mar. 24] a proposal by China's central bank governor Zhou Xiaochuan to supplant the dollar as the world's currency, putting in its place a currency based on a basket of currencies. Central banks already have this ability and they have in fact been diversifying their reserve assets for most of this decade. In the absence of a credible alternative, the dollar is likely to remain the world's reserve currency for at least the next 20 years—until China's economy overtakes the U.S. economy in size and China both liberalizes its foreign exchange regime and creates a debt market where the world's central banks can park reserve assets. (Both Bernanke and Geithner said they would not want to abandon the dollar as the main currency.) Another possibility is the ascendance of a bloc of currencies such as the euro, but it would take degrees of harmonization that are very difficult to achieve, largely because of political considerations and cultural differences.

Still, China's call for change underscores the massive shifts underway in the world of international finance. An interesting aspect of China's proposal is that by calling for increased use of Special Drawing Rights (SDRs)—which is essentially a basket of currencies used for accounting purposes at the International Monetary Fund (IMF)—China is using its economic power to gain influence with an institution that has had substantial influence on world economic affairs, although on a reduced scale in recent years.

China surely has angst, just as other "emerging" markets do, regarding its say in financial institutions that influence the world economy. For example, China's share of voting power at the IMF is just 1.9%, Brazil's is 1.4%, and India's is 1.9%. The U.S. share is 16.8%.

Jan Hatzius, Goldman Sachs

Our forecast implies that the period of outright declines in real consumer spending is likely to be behind us, and modest growth is likely in coming quarters. First, the first quarter appears to be tracking slightly positive. Second, the impact of the increase in credit restraint has likely peaked and should soon cease to have a major negative impact on the change in consumption. Third, real income should continue to perform much better than one might expect based on the weakness in the labor market. Although the positive impact of the decline in energy prices has probably run its course, the fiscal stimulus is likely to pick up the slack.

We see both upside and downside risks to our consumption forecast. The main upside risk lies in the effort by policymakers to unfreeze lending to consumers. If this effort is successful, we might not just see an end to the drag from tightening credit availability, but an actual boost from loosening credit availability. The main downside risk lies in sharper-than-expected multiplier effects from the deterioration in the labor market, both directly via income and indirectly via a further worsening in credit quality.