Page 1 of 2 US allies take hit from QE2
By Peter Lee
With one desperate economic measure - the second quantitative easing or QE2 -
the United States threatens to undo many of its victories won in its campaign
to "Return to Asia" and reassert America's place at the heart of the Asian
diplomatic, security, and military equation.
Many of America's allies, friends, and acquaintances in the region are being
pummeled by the weakening US dollar, as is the designated competitor - and most
likely target - China.
But China, by virtue of its rather closed financial markets, managed currency,
rigid political controls, and acknowledged strategic rivalry with the United
States, is probably better equipped to withstand the pressure of a devaluing
dollar than the
free-market nations that are America's allies.
Even before US Federal Reserve chairman Ben Bernanke announced that the US
government would put US$600 billion in cash in the capital markets through the
purchase of Treasuries, the currencies of most exporting countries had
appreciated significantly against the US dollar, over 10% for most, with
Brazil's real strengthening 35% in 2009.
In the UK, The Telegraph, no friend of quantitative easing, documented the
atrocities on September 29:
Guido Mantega, the Brazilian Finance
Minister, said an international currency war threatened the country's
competitiveness.
Mexico, Peru, Colombia, Korea, Taiwan, South Africa, Russia and even Poland are
either intervening directly in the exchange markets to prevent their currencies
rising too far, or examining what options they have to stem disruptive inflows.
Peter Attard Montalto from Nomura said quantitative easing by the US Federal
Reserve and other central banks is incubating serious conflict. "It is forcing
money into emerging market bond funds, and to a lesser extent equity funds.
There has truly been a wall of money entering many countries," he said.
"I worry that we are on the cusp of a competitive race to the bottom as country
after country feels they need to keep up." [1]
The anxieties
have continued into early November, as AP reported:
China's stock market reached a seven-month high Thursday, and South
Korea's benchmark KOSPI index was close to a three-year high. India's market is
flirting with an all-time record and some markets including Indonesia and the
Philippines have been setting record highs nearly daily.
In the Philippines, where capital inflows have surged this year, the central
bank said Thursday it would "remain vigilant" about the possible impact of the
Fed's action.
…
Last month, Thailand imposed a tax on income foreigners can earn from bonds in
hopes of discouraging an influx of money that has pushed its baht to a 13-year
high against the dollar.
In the Philippines, the influx of short-term "hot money" in the first nine
months of the year jumped 300% from a year earlier to $1.8 billion, according
to the central bank. [2]
China Economic Net was there to relay
the grim news after QE2 was officially announced:
Policymakers from the
world's new economic powerhouses in Latin America and Asia pledged yesterday to
come up with fresh measures to curb capital inflows after the United States
Federal Reserve said it would print billions of dollars to rescue its economy.
...
South Korea's Ministry of Finance and Strategy said it had sent "a message to
the markets" yesterday and would "aggressively" consider controls on capital
flows, while Brazil's Foreign Trade Secretary said the Fed's move could cause
"retaliatory measures."
Economy Minister Ali Babacan of Turkey, where the central bank has been buying
increasing amounts of foreign exchange in an effort to curb appreciation of the
lira against the dollar, said the Fed's action might backfire.
"The Fed move was a measure taken in a desperate environment. It should be
considered whether pumping this much money into the market can create more
damage than benefit," he said.
Thailand raised the possibility of concerted action to combat the flood of
investment dollars that are expected to wash into emerging markets.
....
Zeti Akhtar Aziz, head of Malaysia's central bank, also said Asian central
banks were "willing to act collectively if the need arises to ensure stability
in the region."
A senior Indian finance official .... said that while the US had a right to
stimulate its own economy, others would also serve their own interests and said
that any deal on currencies in Seoul had to be a "win for both the blocs." [3]
For good measure, here's Business Week on November 8:
"Around the world
we have $10 trillion of hot money flowing around, more than the $9 trillion in
hot money at the beginning of the global financial crisis," [Chinese Vice
Finance Minister Zhu Guangyao] said. The US "has not fully taken into
consideration the shock of excessive capital flows to the financial stability
of emerging markets."
...
German Finance Minister Wolfgang Schauble compared the Fed move to China's
currency policy, which involves hundreds of billions of dollars in U.S. dollar
purchases to prevent rapid appreciation of the yuan. "The instruments are
different but the goal is the same," he said in a Nov 5 speech in Berlin.
"This is a U.S. countermove in the global beggar-thy- neighbor process," said
Michael Pettis, a finance professor at Peking University and a former managing
director at Bear Stearns Cos. [4]
On Thursday, China's National
Bureau of Statistics (NBS) said the consumer price index (CPI), a main gauge of
inflation, increased 4.4% year on year in October, 0.8 percentage point higher
compared to September's 3.6%. Chinese officials blame "the effective
devaluation of the US dollar as a result of quantitative easing" as partially
responsible for China's inflation hikes, as the "weak dollar pushes up
commodity prices, which, through international trade, affects prices in China."
[5]
The only country that seems to be completely happy with the current state of
affairs is Australia, which sees the prices of its export resources exploding
together with its currency, which recently broke parity with the dollar.
With reduced interest rates and further dollar devaluation seen as the most
important effect of quantitative easing, nations hoping to export their way out
of the recession face a triple economic burden.
First, the weakening dollar will drive speculative inflows to overseas assets,
with the potential for inflating stock market and real estate bubbles.
Second, the United States is looking to position itself as a growing exporter
on the back of its depreciated currency - and a stronger international
competitor, particularly against the EU.
Third, US international purchasing power declines with the dollar, reducing its
role as an export destination.
The biggest burden, however, may be psychological. The United States appears to
be surrendering its post-World War II role as the last-resort generator of
global demand and redefining itself as just another anxious exporter. It might
be said that the QE2 itself is the first export of this new regime. Indeed, QE2
was "Made in America", a product of American political conditions.
The US recovery is faltering, thanks to an inadequate stimulus. After the
midterms, an adequate stimulus is off the table.
The Republican majority in the House of Representatives has taken a position
against further stimulus spending as a matter of ideology, electoral politics,
and, one would suspect, a cynical willingness to see the US economy go down in
flames, as long as President Barack Obama's hopes for a second term go with it.
With fiscal policy ruled out, monetary policy is the only lever accessible to
the president to create jobsjobsjobs and votesvotesvotes.
Conventional monetary policy - driving down interest rates to near zero -
hasn't restored bank lending and economic activity to a nation still working
its way out from under a mountain of personal and corporate debt.
Which leaves unconventional monetary policy or "quantitative easing" -
increasing the supply of money ex nihilo, from nothing, and hoping something
good comes of the inflation and inflationary expectations it engenders.
However, it will be interesting to people who learned about the multiplier
effect of fractional reserves in college economics classes that the famous
multiplier doesn't seem to work in situations like this. [6]
Instead of the $600 billion in cash racing through the economy and stimulating
trillions of dollars of domestic lending, it will probably land with a dull
thud on the balance sheets of the big money center banks, to be shoveled up and
tossed into the maw of emerging overseas markets instead.
The dollar inflows translate into higher exchange rates and reduced exports.
And it is crappy politics, especially for the allies who have been holding the
free-market/globalization line together with the United States to criticize
China's currency policies, as CNN reported on November 8:
The harshest criticism came Friday from German Finance Minister Wolfgang
Schauble, who told reporters at a conference that, "With all due respect, US
policy is clueless. ... It's not that the Americans haven't pumped enough
liquidity into the market. Now to say let's pump more into the market is not
going to solve their problems."
Schauble went further in an interview with the German magazine Der Spiegel in
which he said the Fed's move undercuts efforts by the United States and Europe
to get the Chinese to allow its currency to rise in value.
"It's inconsistent for the Americans to accuse the Chinese of manipulating
exchange rates and then to artificially depress the dollar exchange rate by
printing money," he said in the interview.
South African Finance Minister Pravin Gordhan, a prominent voice among finance
officials from emerging economies, said the Fed's move was disappointing
because it undermines the spirit of multilateral cooperation that is the reason
for holding Group of 20 meetings.
He said top finance and central bank officials agreed only recently that "given
the high interdependence among nations in the global economic and financial
system, uncoordinated responses would lead to worse outcomes for everyone." [7]
The Obama administration appears to be aware of this public relations
conundrum. It is therefore loathe to acknowledge that the key motive of QE2 is
a de facto devaluation of the US currency, one that will diminish the US trade
deficit and generate export oriented jobs and economic growth for the US.
Nobel economics prize winner and New York Times columnist Paul Krugman, a
vociferous advocate of confronting China on the currency issue, indignantly
rejected any suggestion of equivalence between China's currency policies and US
quantitative easing:
China is engaged in currency manipulation, that is, buying foreign currency to
keep the yuan weak; meanwhile, it is actually moving to reduce domestic demand,
among other things raising interest rates.
So the United States is moving to expand world demand, with a policy that may
weaken the dollar; China is moving to reduce world demand, with a policy of
deliberately weakening the yuan. America's policy may annoy its trading
partners, but they are not the target; China's policy is predatory, pure and
simple. No equivalence here. [8]
However, judging by effects as perceived by finance ministers, rather than
intentions as divined by Krugman, QE2 looks, walks, and quacks a lot like a
devaluation. So it looks like the US is out for itself, competing for a share
of the pie while doing nothing to grow the pie.
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