Can the Federal Reserve revive the U.S. economy with a second round of ‘quantitative easing’, also known as QEII? In essence, this means injecting $600 billion that never existed before into the U.S. and global economy in $75 billion monthly increments.
Reflecting the growing interconnectedness of the global economy, two of the articles we’ve posted on QEII demonstrate growing international discontent with the move, which may benefit the U.S. economy, but will undercut the currencies and economies of other nations.
According to the first article, an editorial from Brazil’s Estadao, the strategy damages countries like Brazil by boosting the value of its currency, making Brazilian products more expensive and U.S. products cheaper.
The Estadao editorial says in part:
The decision by the Federal Reserve (FED, the U.S. central bank) to release another $600 billion into circulation by the middle of next year could be a very expensive proposition for Brazil. The plan is to issue approximately $75 billion per month in one more push to revive the U.S. economy, the activity of which remains at a low ebb and with unemployment above 9 percent. In exchange for this money, the FED will buy federal bonds held by the public. Dollars will continue flooding the markets and force a revaluation of Brazil’s real and other currencies. Brazilian manufacturers will have greater difficulty not only with exports, but also with competing on the domestic market, because their currency is already one of the most overvalued in the world. The Chinese will continue to take advantage of a majority of their competitors because they’ll find a way to keep the yuan undervalued, but perhaps a little less than before just to show some good will.
Everybody roots for the recovery of the American economy, the most important in the world, but not everyone applauds U.S. monetary policy because of its effects on the global exchange market. In practice, the U.S. exports its crisis to the rest of the world, rather than contributing to the overall global recovery.
The second editorial I’d like to bring to your attention, particularly with President Obama preparing for his G20 meeting with Hu Jintao, is from the state-run China Daily, headlined America’s Money Printing is Threat to Global Recovery. The editorial says in part:
The FED’s move to print more money may help boost employment and maintain a low inflation rate domestically, but it will bring a flood of liquidity to the global economy, especially emerging economies, driving inflation expectations to dangerous levels.
If U.S. policymakers turn a deaf ear to international criticism over its latest attempt to stimulate its economy, they risk undermining efforts in other countries to normalize their own monetary and fiscal policies and achieve a lasting recovery.
Even worse, the phenomenal inflationary impact that QE2 has already exerted on global markets could be just the tip of the iceberg. There will undoubtedly be unforeseen consequences to printing such a large amount of U.S. dollars, the key international reserve currency widely used in international commodity trading, capital circulation and financial transactions.
The international community must make it an issue of serious discussion at the G20 summit in South Korea later this week. It is necessary to drive home the message that neither one country or the world as a whole can re-inflate its way out of a crisis as wide and deep as the one we are all still suffering from.
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