Bernanke points to weak yuan to defend flow of 'easy money'

US FEDERAL Reserve chairman Ben Bernanke yesterday defended "easy money" policies in advanced economies against the charge that they are overheating emerging markets.

Speaking ahead of a G20 economic summit in Paris that will include many critics of the Fed's monetary policy, Bernanke acknowledged that strong capital flows from advanced economies to emerging markets may be having negative spillover effects.

"Capital flows are once again posing some notable challenges for international macroeconomic and financial stability," he said in remarks prepared for delivery to the meeting of the finance ministers and central bankers of the group of 20 leading economies.

However Bernanke said that although policy-makers in the emerging markets clearly face challenges, their concerns should be weighed against stronger emerging market growth.

The Fed chairman also urged countries with large trade surpluses such as China to let their currencies rise in value to help prevent another global financial crisis.

"Countries with excessive and unsustainable trade surpluses will need to allow their exchange rates to better reflect market fundamentals and increase their efforts to substitute domestic demand for exports," Bernanke said.

US officials argue that by keeping the yuan weak, the Chinese government is supporting an export-led economy that leads to its large trade surplus with the United States.

But Bernanke conceded the need for US fiscal discipline as part of improving global balances of trade and investment and said that countries with persistently high trade deficits must increase savings and put their fiscal houses in order.

He did not mention inflation concerns directly except to say that strong demand in emerging markets was contributing to global commodity price increases which affected all consumers.