When all else fails – go Global. That’s what the Federal Reserve is doing with its move to Quantitative Easing. “QE”, as it is better known, occurs when the Fed buys US Treasury Bonds (which is a sexy way to say they are printing money to flood the economy through the banks).
The Fed has tried everything it can to get us to borrow and spend. It learned what it already knows – that it cannot force consumers to spend and banks to lend. So now QE is the last bullet in their gun, but it’s a shot that will be heard around the world.
By pumping $600 billion into “the economy”, the Fed will purposefully devalue the dollar. As a result, U.S. products become cheaper around the world and foreign goods become costlier in the United States. Americans become less likely to buy foreign products, and with exports becoming cheaper to the world, the Fed creates a trade advantage. It theoretically gets the world to pay for it’s mistakes.
But what happens if the other guy shoots back? China has for years. Their purposeful devaluation of the Yuan has made investment in China attractive, their labor cheap and it has built their factories. The problem is China had become dependent on global trade rather than it’s own domestic consumption. So if the U.S. fires one over the bow, they might be obliged to roll out a cannon and blast right back at us.
QE also reduces the return on US dollars, creating problems for developing nations as “hot money” flows into their coffers in search of a return. The same holds true for commodities – which rise as investors seek a return by any means possible. This then creates bubbles that are sure to pop when things unwind as investors dump their positions in commodities and developing nations.
About the only ones that stand to gain are those that get the trade right – and that’s the Wall Street bank that makes the right bet in order to gamble their way out of the mortgage/housing mess that was created by loose credit.
And so starts a global currency and trade war. Fears over this are the reason nothing was accomplished at the G20 summit. And the truth is, the United States should earn its way out of its crisis instead of piling on more debt that it can’t repay and then pulling off the QE stunt.
