Ben Bernanke feels compelled to defend his decision to undertake another round of quantitative easing to try to stimulate the US economy. And why? Because a number of Latin American and Asian countries have criticized his decision, claiming that this will only exacerbate global imbalances and not help the US economy.
Are the “leaders” of these countries stupid or hypocrites or both?
Why are these countries complaining? They fear that a further injection of liquidity into the US financial system will chase investors to their countries in pursuit of more return with little additional risk (greed has no bounds and is not restricted to Wall Street). This in turn will put upwards pressures on their currencies, which will make their companies less competitive in global markets, especially the US. Making matters worse for them is China’s policy to keep its currency fixed in value against the US dollar. Hence, as the US dollar continues to decline in value against most currencies, so too does the Yuan, further enhancing the competitive position of Chinese companies in global markets. Instead of pointing the finger at China, they choose to point at the US.
Many of the complainers are threatening to impose additional curbs on capital inflows to protect their currencies from further appreciation against the US dollar. But these same countries are counting on exports to lead their growth. And where do they expect the growth in demand for their exports to materialize? The US of course.
These same countries, together with many of the EU members, also complain that the US trade deficit and the US Government budget deficit are the principal sources of global imbalances, and together they threaten the economic recovery.
But isn’t a decline in the value of the US dollar against the currencies of its major trading partners needed to rectify the trade deficit and gradually eliminate one of the critical imbalances? Of course, but none of the US trading partners wants to bear the costs of the needed adjustments. Each would prefer that someone else bears the costs. With friends like this…
The complainers will respond as follows: While a decline in the value of the US dollar might play a role, a much more important role would be played by a sustained reduction in the US budget deficit, just like many EU countries are undertaking. This simplistic argument is based on the belief that the budget and trade deficits are interconnected; that is, the former results in the latter (check out Germany). While this argument is utter nonsense, it shifts the blame to the US and removes all responsibility from the shoulders of the “great world leaders” who criticize Bernanke.
What if the US listened to this advice? The first effect would be to push the US economy back into a recession. The EU is slipping back into a recession for this very reason. A double dip in the US would lead to a significant decline in imports from all countries – the US trade deficit did improve during the 2008 recession. The next effect would be to push the economies of the complaining countries into or to the precipice of another recession. So much for their export-led growth!
A double dip also would chase investors out of US financial assets and back to the complainers, pushing up the value of their currencies against the US dollar. Oops – now we would have the negative spillover of a recession in the US combined with appreciation of the currencies of these countries. Whom would they blame then?
Regardless of the composition of the new Congress in the US, it is unlikely that they will undertake drastic budget measures that will threaten the economic recovery. But they might become more protectionist. Why shouldn’t the US defend its own economic interests?
In this case, export-led growth for these other countries flies further out the window.
The complainers could try to stimulate their domestic demand, and if successful, this would strengthen their economies and create export opportunities for US-based companies, thus helping the US reduce its trade deficit. However, how could the “leaders” of these countries explain stimulative budgetary measures to their people when they have been complaining vociferously about the US budget deficit, and in the case of the EU, they have been drastically cutting spending?
Thus, I ask once more, are they stupid or hypocritical or both? You can be the judge.
The opinions expressed in this blog are personal and do not reflect the views of either Global Brief or the Glendon School of Public and International Affairs.