Delivered at The Institute of Regulation and Risk North Asia, The Grand Ballroom, Conrad Hotel, Pacific Place, Hong Kong. This speech was also delivered at The Institute of Regulation and Risk North Asia, The InterContinental Hotel, Tokyo Bay, Japan, June 14, 2010.International economic integration ; Economic conditions ; Monetary policy

James Bullard

English

Research Papers in Economics

1 
 
 
The Global Recovery and Monetary Policy 
James Bullard
1
President, Federal Reserve Bank of St. Louis 
 
 
The Institute of Regulation and Risk North Asia 
The Grand Ballroom, Conrad Hotel, Pacific Place, Hong Kong 
June 15, 2010 
 
 
I appreciate the opportunity to talk here tonight concerning the economic challenges facing the 
global economy.  My opening remarks for this panel are intended to be broad-based, covering a 
wide range of issues.  Still, I will not be able to cover all topics and so I hope that we can have a 
vigorous question and answer session later, in which I will have a chance to address additional 
concerns about the status of the global economic recovery generally and U.S. monetary policy 
in particular. 
 
As usual, the remarks I make here tonight represent my own views and do not necessarily 
reflect the views of other FOMC participants. 
 
My remarks are divided into three parts.  First I will comment on the strength of the global 
economy.  Asia has been a leader in the worldwide recovery following the very large global 
shock of late 2008, and I expect that leadership to continue during the remainder of 2010 and 
into 2011 and beyond.  Next, I will turn to the U.S. economy, which is also growing, although 
not as strongly as some parts of Asia.  My expectation is that growth in the U.S. is likely to 
continue at the current pace, or perhaps slightly faster, during the remainder of 2010 and into 
2011.  Finally, I will turn to the ongoing sovereign debt turmoil in Europe and try to assess a few 
of the implications for the global economy.  My sense is that, while the sovereign debt crisis in 
Europe is indeed a serious matter, the global recovery at this point looks very strong and seems 
unlikely to be derailed. 
 
Let me turn first to the strength of the global recovery. 
 
 
THE STRENGTH OF THE GLOBAL RECOVERY 
 
According to the April 2010 International Monetary Fund World Outlook, 2009 was a year in 
which global real GDP actually contracted.  That is very rare indeed, something that did not 
occur in any year in the 1970s, the 1980s, the 1990s, or in the current decade before 2009.  
                                                           
1 I appreciate assistance and comments provided by my colleagues at the Federal Reserve Bank of St. Louis. 
Marcela M. Williams, Special Research Assistant to the President, provided assistance. I take full responsibility for 
errors. The views expressed are mine and do not necessarily reflect official positions of the Federal Reserve 
System.  Similar remarks were given at the InterContinental Hotel, Tokyo Bay, Japan “An Evening Dialogue with Dr. 
James Bullard,” organized by the Institute of Regulation and Risk North Asia  2 
 
That is to say, despite all of the crises and upheavals of various types that occurred during the 
past four decades—the story has nevertheless been one of sustained growth globally up until 
2009.  This shows how severe the global financial panic of 2008 really was, and it also suggests 
that global integration is much stronger than it may have appeared several years ago.  I was 
very concerned that we had encountered the first truly global recession in many years, and that 
we knew little about how the global economy might behave in such a circumstance. 
 
As it has turned out, however, the global economy is now in the middle of a powerful recovery 
led by Asia.  The IMF projects global growth will return in 2010 and continue into 2011.  They 
forecast that world output will grow at a rate of 4.2 percent in 2010 and 4.3 percent in 2011.  
That growth is not evenly distributed, to be sure, but should it materialize it will be a great 
improvement over 2009. 
 
With Asia as a leader in the global recovery, a risk is that the Asian economies might falter in 
some way, causing global growth to slow appreciably.  Certainly, many Asian equity price 
indexes have declined substantially over the past two months, including those in China, possibly 
pointing to bleaker days ahead. But I would council caution in interpreting the volatile equity 
price data, as these markets are prone to overreaction and exaggeration.  Still, one might worry 
that some type of “bubble” has formed in the Chinese economy in particular and that a 
disorderly unraveling of that situation might somehow derail the Asian-led global recovery. 
 
While I am sympathetic to the possibility of “bubble” phenomena in macroeconomics generally 
speaking, I do not think that we should interpret China in this light at the current juncture.  The 
more sensible interpretation of China is the one that has held sway for many years:  It is a 
rapidly developing economy that is importing available production technology from the rest of 
the world, and creating its own as well, in a manner that leads to substantial gains in 
productivity, national income, and the national standard of living.  Viewed this way, China has 
in the past year simply returned to its rapid growth path and is likely to remain on that path for 
a considerable period of time.  Is every price in China exactly the one that would be associated 
with fundamentals in a country with perfectly functioning, perfectly free markets?  Probably 
not.  But still, the big picture is that rapid Chinese growth can easily be reconciled with the 
fundamentals, and so the risk of a sudden slowdown in China derailing the global recovery, 
while certainly not zero, seems limited. 
 
Let me now turn to the U.S. economic outlook. 
 
 
THE U.S. ECONOMY 
 
The macroeconomic recovery in the U.S. remains on track and may be complete in the third 
quarter.  U.S. real GDP peaked in the second quarter of 2008.  As of the first quarter of 2010, 
real GDP stands just shy of the 2008 second quarter level, so that growth of about 1.25 percent 
would be sufficient to allow real GDP to surpass the previous peak.  At that point, the U.S. 
economy would be fully “recovered” from the very sharp downturn of late 2008 and early 2009.  3 
 
To be clear, the 1.25 percent is a quarterly number, and would be 5.0 percent at an annual rate.  
Although I think that 5.0 percent at an annual rate is too much to expect for current quarter 
real GDP growth, it seems like a reasonable possibility over the next two quarters combined. 
Given these conditions, I expect the U.S. recovery in GDP to be complete in the third quarter of 
this year. 
 
Indeed, U.S. real personal consumption expenditure has already surpassed its previous peak, 
which occurred in the fourth quarter of 2007.  Real investment has not fully recovered to its 
pre-recession peak, but has been improving. 
 
The near-recovery in U.S. output has so far not been matched by a similar recovery in U.S. 
employment.  Measures of labor input to production remain far below their peak levels.  
Significant job gains have occurred during the past several months, but generally speaking the 
increased level of production in the past year has come through productivity gains, not through 
employment gains.  While productivity gains are welcome, firms will most likely have to hire 
workers during the remainder of 2010 to keep up with increasing demand. 
 
Like Asia, the U.S. has experienced an increase in financial market stress during the past two 
months, mostly in response to events in Europe.  U.S. equity prices have declined substantially.  
The VIX index, a measure of volatility, is well above its average value over the past two decades.  
The St. Louis Federal Reserve Bank financial stress index, which had declined more or less 
continuously since early 2009, has now turned around and moved sharply higher.  At this point, 
I think these movements reflect more worry than reality about the prospects for a slowdown in 
global growth.  Still, the European sovereign debt situation is serious and there are many 
unanswered questions about how events will unfold. 
 
The crisis has produced at least two advantages for the U.S. in the near term.  Much as it did 
during the Asian currency crisis of the late 1990s, the U.S. is benefitting from a flight to safety 
effect in world financial markets, which has driven down U.S. Treasury yields.  From a peak yield 
of about 4.0 percent in early April for 10-year Treasury securities, the market has moved below 
a 3.2 percent yield on some recent trading days.  To the extent this type of movement is 
sustained, it affects all trading in U.S. financial markets and acts like an aggressive and 
successful monetary policy action.  If the situation in Europe continues to spark market 
volatility, the flight to quality will sustain lower yields in the U.S. than would otherwise be the 
case.  The turmoil has also sent commodity prices lower, which, overall, tends to help the U.S. 
economy. 
 
The U.S. dollar has of course strengthened against the Euro during the crisis.  On a TWEX basis, 
however, the dollar is about where it was one year ago.  
 
 
   4 
 
THE EUROPEAN DEBT CRISIS 
 
The key concern in world financial markets has been the extent to which the sovereign debt 
crisis in Europe portends a global shock, possibly strong enough to upset the picture of global 
recovery I have been sketching. 
 
There is no question that, in part as a response to the events of 2008 and 2009, many 
governments in Europe and elsewhere elected to increase deficit spending and thus to increase 
their debt as a percentage of GDP.  For some countries, starting from weak economic 
conditions, the increase in borrowing was so large as to call into question their ability and 
willingness to repay in international financial markets.  Confidence lost in such markets is 
difficult to regain, and for this reason I think we can expect market concerns to remain for 
months, possibly years, rather than just days or weeks.  Governments must take aggressive 
action to earn credibility, and then sustain that effort over a long period of time.  I think that a 
well-run fiscal consolidation can be a net plus for economic growth, as it was in the U.S. during 
the 1990s. 
 
To be sure, sovereign debt crises are not at all unusual in the history of the global economy.  
Nations often have incentives to borrow internationally and are not always willing to repay.  
While sovereign debt restructuring or outright default is often associated with substantial 
market volatility—understandably, since some parties are not getting repaid—the events are 
not normally global recession triggers.  A relatively recent and prominent example was the 
Russian default of 1998. 
 
The agreement in Europe to provide funding if necessary through an SPV backed by 
government guarantees and through the IMF has provided time for the affected countries to 
enact fiscal retrenchment programs.  Those programs have a good chance of success because 
the incentive for countries to keep unfettered access to international financial markets is 
substantial.  Even if a fiscal consolidation program does not go well in a particular country, so 
that a restructuring of debt has to be attempted at some point in the future, restructuring is 
not unusual in global financial markets and can be accomplished without significant disruptions. 
 
One of the persistent worries during this crisis has been that some of the largest financial 
institutions in the U.S. and Europe might be exposed to additional losses and that a type of 
financial contagion could occur should conditions worsen.  I think this is a misreading of the 
events of the past two years.  U.S. and European policymakers have essentially guaranteed the 
largest financial institutions.  This has been the essence of the very controversial “too big to 
fail” policy.  The policy has clear problems, including its inherent unfairness and the fact that 
economic incentives for institutions that are guaranteed can be badly distorted.  But to argue 
that governments would now give up these guarantees in the face of a new shock that could 
threaten the global economy seems to me to be far-fetched. 
 
One important lesson from the European sovereign debt crisis, well-known in emerging 
markets, is that borrowing on international markets is a delicate matter.  There can be benefits 5 
 
of such borrowing in some circumstances, but too much can erode credibility and lead to a 
crisis in the borrowing country.  In short, countries cannot expect to borrow internationally and 
use the proceeds to spend their way to prosperity. 
 
The U.S. fiscal situation is difficult as well, with high deficits and a growing debt-to-GDP ratio.  
The U.S. has exemplary credibility in international financial markets, built up over many years.  
Now that the U.S. economy is about to achieve recovery in GDP terms, it is time for fiscal 
consolidation in the U.S.  Irresponsibly high deficit and debt levels are not helping the U.S. 
economy and could damage future prospects through a loss of credibility internationally.  A 
substantial and credible fiscal adjustment could set up the U.S. for a sustained period of 
growth, as it did in the 1990s.   
 
 
CONCLUSION 
 
In conclusion, I hope I have provided enough background in these remarks to set up an 
interesting discussion.  I will be happy to comment not only on the content here, but also on 
many other issues that I was not able to address in these brief remarks.  Thank you very much. 
 
 
 
REFERENCES 
International Monetary Fund.  World Economic Outlook (WEO). Rebalancing Growth.  April 
2010. 
 
 

Fund. World Economic Outlook (WEO). Rebalancing Growth.

The global recovery and monetary policy

http://research.stlouisfed.org/econ/bullard/BullardHongKongFINAL.pdf

The global recovery and monetary policy

Abstract

Similar works

Full text

Available Versions

Research Papers in Economics