Free Markets, Free People

Quantitative Easing II: Making No One Happy

The reactions to the Federal Reserve’s announcement that they would embark on a new, $600 billion round of quantitative easing is raising reactions from all around the world.

China:

Unbridled printing of dollars is the biggest risk to the global economy, an adviser to the Chinese central bank said in comments published on Thursday, a day after the Federal Reserve unveiled a new round of monetary easing.

Germany:

German Economy Minister Rainer Bruederle said on Thursday he was concerned at U.S. efforts to stimulate growth by injecting liquidity into its struggling economy.

“I view that not without concern,” Bruederle said, adding that a variety of measures were needed to solve the problem and it was not enough to pump in liquidity alone…

Bruederle also said there was some truth to the criticism that the United States was influencing the dollar’s exchange rate with monetary policy and voiced concern about increased protectionism in different forms around the world.

Brazil:

Brazilian officials from the president down have slammed the Federal Reserve’s decision to depress US interest rates by buying billions of dollars of government bonds, warning that it could lead to retaliatory measures.

“It’s no use throwing dollars out of a helicopter,” Guido Mantega, the finance minister, said on Thursday. “The only result is to devalue the dollar to achieve greater competitiveness on international markets.”

Brazil, especially, seems to be treating this as a currency devaluation war, and, according to the Financial Times, really doesn’t like that.

But the worries go far beyond trade and protectionism issues brought about by fears of devaluation.  It’s the domestic inflationary effects which have many–including me–worried:

Federal Reserve policies have put the US dollar the risk of crashing, which will hammer consumers through higher prices, strategist Axel Merk told CNBC…

“So we will have a cost-push inflation. We’re going to get inflation but not where Bernanke wants to have it. We’re not going to get wages to go up. We’ll get the price at the gas pump to go up instead.”

We’re right on a path towards high inflation and slow economic growth, otherwise known as “stagflation”.  Except that there’s a lot more monetary expansion this time than we experienced in the 1970s.  Maybe we’ll have to coin a new term, like “hyperstagflation”.

Oh, and in case you were wondering, it begins like this.

“So we will have a cost-push inflation. We’re going to get inflation but not where Bernanke wants to have it. We’re not going to get wages to go up. We’ll get the price at the gas pump to go up instead.”
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13 Responses to Quantitative Easing II: Making No One Happy

  • “Maybe we’ll have to coin a new term, like “hyperstagflation”.
    I think perhaps, given the administration in power, you might call it “Hopeystagflation”.

  • Ron Paul will now be in charge of the sub committee responsible for the Fed.  If we get inflation, and we are getting food inflation now, expect some fireworks.

  • Nice with the hope-n-change reference.  But I’d go with the “Fall of re-stagflation”, to follow the “Summer of re-cover-upery”.
    Funny thing about currency devaluation;  a lot of worldwide agriculture business is done in dollars, though there is movement towards the euro.  The dollar needs to be stable.  We’ll see how this blows up or blows over….

  • Dear China,
    You have told us that the exchange rate of the Yuan to the D0llar is a purely domestic matter where China follows her own interests. So, with any monetary expansion by the US Fed is a US internal decision. p.s. No one forced you to sterilize your trade imbalance for decades by buying US Treasuries and other bonds.
    Dear Germany,
    I really cannot feel bad for you. Your products sell pretty well at whatever level the Euro is at. I do feel really bad for Greece, Spain, Ireland, Italy, Portugal, and all of the countries who desperately need a weaker currency.
    Dear Brazil,
    Didn’t you guys just put in a tax on foreign money buying your domestic financial products to help prevent your currency from rising?
    Dear Americans,
    Don’t worry, we will figure out how to unwind this if inflation starts to take off. Trust us! Would Alan Greenspan giving a speech help? No? Huh.

  • Of course, the Senate will have hearings about how the grocery stores are ripping off the consumers….

  • I’ve still got my gold from last year, and now I am buying silver.  Before the end of the year, when the capital gains tax cuts expire, I will cash out my biggest stock  investment and use the money to pay off my house.  It makes no sense to hold a large amount of currency,  (unless one of you can reccomend a foreign currency that is not likely to crash. )

  • And why exactly does Bernacke have this huge authority over the financial system?  When the Fed was established, was it with the intent that it should be able to manipulate the national (and, by extension) world economy to this extent?

    In other words, who died and made Bernacke god???  If you want that job, you’d better be really, really good.  “Throwing money out of helicopters” doesn’t seem to me the plan of the sharpest tool in the shed.

    SharpshooterOf course, the Senate will have hearings about how the grocery stores are ripping off the consumers….

    If they aren’t too busy investigating steroid and beaver tranquilizer use in professional dodgeball, that is.

    Seriously, Sharpshooter‘s snarky comment is spot-on: the Congress likely WILL blame the wrong people for any problem.  Part of it is that the average member of Congress is an ignorant dolt whose knowledge is limited to getting and enjoying the perqs of office; the intricacies of the monetary system are simply beyond them.  The larger problem is that many of them don’t WANT to get to the bottom of it.  For one thing, it may put a few of their own sacred cows at risk*.  For another, it’s much better to have a hazily defined problem so that they can more easily demagouge it.

    —–

    (*) How much do you think Dodd or Frank, for example, really want the subprime crisis fully investigated and explained?

    • All organizations over time do the following; Mission creep, power grabbing, inefficiencies, cover up mistakes, and move to the political left.

      ALL, it always happens. That is why it is foolishness to give bureaucracies so much power to begin with.

      Especially an unelected group of private banks owned by a lot of old money.

  • Isn’t hyperstagflation the dream of every buck…???

  • I am  going to be contrarian and agree with QE II. What happened is that emerging economies (LOL including even Japan)  used undervalued currencies and sterilization for decades to export to the USA. This sped up globalization but left them dependent on exports to our market, not exactly a healthy thing when the USA finally hit the skids. The re-alignment needs to happen – but they don’t know/want it to happen now when “things are bad.” The reality is that China could have exported clothes and toys merrily while importing planes and cars. Instead they wanted everything – want to sell Airbuses to China? Produce them in China with a “Joint Venture” partner, i.e. a state-run enterprise who will pillage any IP or know-how you put near them. They sterilized all of their export balances into US treasuries and housing bonds. We bailed them out on the housing bonds, even. Now, they are worried about what the paper promised they bought will be worth in the future? You make it almost mandatory to move production to China, and now you worry that those paper promises won’t buy many physical goods?
    You hear now on the news how they are worried about their export-led recoveries due to the US QE. The problem is that the US is the one who needs the export led recovery, but we are not allowed this due to the sterilization, controlled exchange rates, and our role as the reserve currency. Not only that, the US economy is slowly reducing consumption, so even if they want to export ever more products to us, it won’t work. But they know nothing else.  Jesus, China wants to lower its currency so hard, that domestic interest rates are below inflation. Uhhhh, you’re growing at 8-10%, with actual real inflation, so WTF?
    Its one thing to look at the USA and say, well, we might have inflation or deflation, or stagflation, who knows. But countries like China have interest rates below inflation and actual inflation designed to spur growth and keep the currency weak. This seems much more dangerous too me – more malinvestment, more global imbalance, more chance for a trade war. Its one thing when a small country like Taiwan or Korea did this in the past – now we are talking: China, Korea, Taiwan, Japan, Brazil (though they are not exporting to the US but to Asia.) This is approaching half the planet.
    Disclosure: My business is about 80% export to the USA and Europe. We do now have an import business that’s growing which involves importing US made products. So, its not as if I would gain from a weaker US dollar – though my entire portfolio is dollar-weak.

  • Except that we’re not having inflation. If anything, we’re verging on deflation. Food prices are only a small part of the average family budget, and an accordingly small part of CPI.  We should attempt to get the econmy back on the path it was on before the crash (minus the subprime/derivative debacle.) I think it’s good to get the economy back on its long term path. This is hard…Fortunately if something isnt’ working, we can get rid of it.

  • Harun:
    I think you have valid points and argue sanely. Sadly this is an insane world and where once the US Govt. could at least be counted on to be stable economically and politically, now we are going to hell in a hand basket and have to pin our hopes on the Tea Party movement.
    Make no mistake, I have absolutely no problem with unknowns becoming Mr. & Mrs. Smiths going to Washington and scaring the very pants off of the effete elite. My only comment about that is … “Don’t forget your pitchforks and torches.”
    I’ve lived overseas for too many years and have had to endure too many lectures about America, and now, … and now, that America is acting in precisely the same manner as various narrow-minded world actors past and present, each espousing their socialist ‘solution,’ I laugh now that the shoe is on the other foot.
    China can bite it. Germany ditto. Brazil? since when does the leadership think it has any skin in the game and especially so after the election of the new Prez.
    As for Greece, Spain, Ireland, Italy, Portugal, and all of the countries who desperately need a weaker currency … and especially, Greece, Spain, Italy, and Portugal … government is not the answer. Just look at us for an example.