A knowledgeable reader with a background in banking weighs in on the Fed’s quantitative easing plan:
It is a good thing we are having the QE2 debate, but more than anything it shows a breakdown in respect for America overseas – an irony for an administration that was supposed to restore our standing supposedly “lost” due to our Cowboy ways.
The world has always expected us to the be the adult in the relationship. Yes, they sling arrows and whine and complain, but in the end, they respect and need our leadership. The relationship is the reason the dollar is the world reserve currency.
China needs a debased currency for social reasons. They need to keep zillions of people employed by driving down their wages. It might suck for the Chinese worker, but high employment helps the regime keep authoritarian rule.
The Euro was kept under pressure by the wayward PIGS (Portugal, Italy, Greece, Spain) and a generous social welfare system that bled growth from the economy elsewhere.
Now the US wants in on the debasement business, and many are rightfully panicked.
The purchase of a $1T of long term securities by the Fed in February 2009 was an obvious debasement, but it was plausibly justified by the housing crisis and the need to “monetize” massive government-insured losses. Plus, pretty much everyone else in the world was forced in to doing something similar. This was our one get out of jail free card.
QE2 is different. It is raw, unadulterated currency debasement for economic planning purposes. So, what are the issues?
A. The decision of the US to get in the currency manipulation game threatens the status of the dollar as the world wide reserve currency, which has wide-ranging political and economic consequences.
B. A currency war is the last thing we need for sustainable economic growth. It is a gimmick, which is sustainable on the margins, but is not a true economic tool.
C. Growth comes chiefly from investment, which is boosted by confidence that expectations will be met.
D. Confidence and expectations are foiled for a lot of reasons (technology change, cultural shift), but chief among those reasons is unpredictable government actions.
E. By putting the US in the currency manipulation game, we have introduced yet another way for the government to be unpredictable.
I should add that we are absolutely experiencing inflation in a number of areas of the economy, where pricing power permits it (common carriers, food, govt fees, etc.)
All I know is, the inflation-hedge securities I own are doing very well; it’s a sharp contrast with my usual investment acumen.