 "As Fed cuts stimulus, central banks overseas expand theirs")
As the growth of the United States economy outstrips the rest of the developed world, American policy makers are allowing Europe, Japan and even China to seek a little more prosperity - at the expense of Americans.
The Barack Obama administration and the US Federal Reserve have watched quietly in recent years as foreign governments and central banks have chipped away at the dollar value of their currencies, strengthening their export industries in the hope of stimulating their economies.
The trend is likely to intensify over the next year as the Fed retreats from its own stimulus campaign while the European Central Bank and the Bank of Japan expand their efforts. Mario Draghi, the head of the European Central Bank, said on Thursday that it would begin a new round of bond purchases this month.
The US has long argued that markets should determine the value of currencies and criticised nations that try to manipulate exchange rates. The current silence reflects both the simple reality that the American economy needs less help than the rest of the developed world and the judgement of officials that the United States would benefit greatly from stronger global growth. That, they say, would be true even if, in the short term, it makes the country's goods a little harder to sell and jobs a little harder to find.
"You're seeing American officials turn a blind eye to Mario Draghi talking down the euro, and turn a blind eye to interventions by the Chinese, because in both cases they're making the judgement that having a stabilised situation and decent growth prospects in these countries is far more important," said Adam Posen, president of the Peterson Institute for International Economics. "I tend to agree with that."
American leaders have embraced and celebrated a strong dollar as evidence of a strong economy. It lets Americans buy more foreign goods and borrow more cheaply from foreign countries. It also may draw foreign investors to American financial markets, supporting the rise of asset prices.
But the rise of the dollar carries large risks, too. It makes it harder for American companies to sell goods and services. It may be contributing to the sluggish pace of domestic inflation. And some economists warn that letting the dollar rise is not a sustainable method of encouraging growth.
"A strong dollar, fuelled by higher US interest rates, will likely expose vulnerabilities in other parts of the world," Stephen King, chief global economist at HSBC, wrote in a research note on Thursday. "Latin American countries already flirting with recession would certainly not welcome a tightening of US monetary conditions." Some economists said the United States should seek to limit the dollar's rise through diplomacy and policy, and that the Fed should seek to limit its divergence from other central banks by extending its stimulus campaign.
A recent report by the Bank for International Settlements, essentially the bank for central banks, also questioned the global benefits of a stronger dollar, predicting it would tighten financial conditions because foreign banks rely heavily on dollar funding.
But Stephen Cecchetti, a professor at Brandeis University, said the world had a strong interest in Europe's health. "It's going to create some instability, but the alternative is worse," said Cecchetti, former chief economist of the Bank for International Settlements. "You don't want to be around if there's a real depression in Europe."
The central bank still has not fully deployed the arsenal of a modern central bank to improve growth in Europe. It has refrained from the large-scale purchases of government debt undertaken by the Fed, the Bank of Japan and the Bank of England.
But in recent months it has sought to push down the value of the euro through a variety of measures. In September, the central bank offered loans that were practically interest-free to commercial banks that promised to lend the money to businesses and consumers.
On Thursday, after a board meeting Naples, Italy, the central bank outlined a two-year plan to buy private sector assets, including bank loans packaged into securities. "These purchases will have a sizable impact," Draghi said at a news conference after the meeting.
One euro, which bought $1.39 in April, bought only $1.26 at the end of September. "We needed to bring the euro down and we still need to bring the euro down," Christian Noyer, a central bank board member from France, said in a recent interview with the French broadcaster Radio 1.
While such efforts are usually aimed at increasing exports, the central bank is focused on imports, too. A weaker euro raises the price of imported fuel and other products, which could help budge inflation. Prices in the Euro zone last month increased at an annualised rate of just 0.3 per cent, far below the 2 per cent pace the central bank and other major central banks in the developed world regard as best for sustainable growth.
"This is a currency war where stealing inflation rather than growth is the goal," economists at the British bank HSBC wrote in a report published on Wednesday. The question, they said, "is whether the US economy can generate sufficient inflation internally to tolerate the deflationary impact of a stronger dollar."
So far, American officials primarily seem frustrated that the European Central Bank continues to act slowly. James Bullard, president of the Federal Reserve Bank of St Louis, last year became the rare official to call publicly for stronger action when he told an audience in Frankfurt that the central bank should buy government bonds.
Another question is whether the programs will provide a sufficient jolt. A similar lending programme started by the Bank of England in 2012 has not reversed the decline in small-business lending in that country.
"Nobody's hiring, nobody's investing, nobody's spending," said Stefano Micossi, the director general of Assonime, an Italian business group. "There is no demand for credit. The system is not constrained by the funding side. The banks are awash in liquidity."
Japan, which has been grappling with the problems confronting Europe for more than two decades, is also seeking growth through currency moves. Under the "Abenomics" stimulus campaign that Prime Minister Shinzo Abe began in early 2013, the Bank of Japan has agreed to double the money supply, and the price of yen in dollars has dropped by about 24 per cent.
The Barack Obama administration and the US Federal Reserve have watched quietly in recent years as foreign governments and central banks have chipped away at the dollar value of their currencies, strengthening their export industries in the hope of stimulating their economies.
The trend is likely to intensify over the next year as the Fed retreats from its own stimulus campaign while the European Central Bank and the Bank of Japan expand their efforts. Mario Draghi, the head of the European Central Bank, said on Thursday that it would begin a new round of bond purchases this month.
The US has long argued that markets should determine the value of currencies and criticised nations that try to manipulate exchange rates. The current silence reflects both the simple reality that the American economy needs less help than the rest of the developed world and the judgement of officials that the United States would benefit greatly from stronger global growth. That, they say, would be true even if, in the short term, it makes the country's goods a little harder to sell and jobs a little harder to find.
"You're seeing American officials turn a blind eye to Mario Draghi talking down the euro, and turn a blind eye to interventions by the Chinese, because in both cases they're making the judgement that having a stabilised situation and decent growth prospects in these countries is far more important," said Adam Posen, president of the Peterson Institute for International Economics. "I tend to agree with that."
American leaders have embraced and celebrated a strong dollar as evidence of a strong economy. It lets Americans buy more foreign goods and borrow more cheaply from foreign countries. It also may draw foreign investors to American financial markets, supporting the rise of asset prices.
But the rise of the dollar carries large risks, too. It makes it harder for American companies to sell goods and services. It may be contributing to the sluggish pace of domestic inflation. And some economists warn that letting the dollar rise is not a sustainable method of encouraging growth.
"A strong dollar, fuelled by higher US interest rates, will likely expose vulnerabilities in other parts of the world," Stephen King, chief global economist at HSBC, wrote in a research note on Thursday. "Latin American countries already flirting with recession would certainly not welcome a tightening of US monetary conditions." Some economists said the United States should seek to limit the dollar's rise through diplomacy and policy, and that the Fed should seek to limit its divergence from other central banks by extending its stimulus campaign.
A recent report by the Bank for International Settlements, essentially the bank for central banks, also questioned the global benefits of a stronger dollar, predicting it would tighten financial conditions because foreign banks rely heavily on dollar funding.
But Stephen Cecchetti, a professor at Brandeis University, said the world had a strong interest in Europe's health. "It's going to create some instability, but the alternative is worse," said Cecchetti, former chief economist of the Bank for International Settlements. "You don't want to be around if there's a real depression in Europe."
The central bank still has not fully deployed the arsenal of a modern central bank to improve growth in Europe. It has refrained from the large-scale purchases of government debt undertaken by the Fed, the Bank of Japan and the Bank of England.
But in recent months it has sought to push down the value of the euro through a variety of measures. In September, the central bank offered loans that were practically interest-free to commercial banks that promised to lend the money to businesses and consumers.
On Thursday, after a board meeting Naples, Italy, the central bank outlined a two-year plan to buy private sector assets, including bank loans packaged into securities. "These purchases will have a sizable impact," Draghi said at a news conference after the meeting.
One euro, which bought $1.39 in April, bought only $1.26 at the end of September. "We needed to bring the euro down and we still need to bring the euro down," Christian Noyer, a central bank board member from France, said in a recent interview with the French broadcaster Radio 1.
While such efforts are usually aimed at increasing exports, the central bank is focused on imports, too. A weaker euro raises the price of imported fuel and other products, which could help budge inflation. Prices in the Euro zone last month increased at an annualised rate of just 0.3 per cent, far below the 2 per cent pace the central bank and other major central banks in the developed world regard as best for sustainable growth.
"This is a currency war where stealing inflation rather than growth is the goal," economists at the British bank HSBC wrote in a report published on Wednesday. The question, they said, "is whether the US economy can generate sufficient inflation internally to tolerate the deflationary impact of a stronger dollar."
So far, American officials primarily seem frustrated that the European Central Bank continues to act slowly. James Bullard, president of the Federal Reserve Bank of St Louis, last year became the rare official to call publicly for stronger action when he told an audience in Frankfurt that the central bank should buy government bonds.
Another question is whether the programs will provide a sufficient jolt. A similar lending programme started by the Bank of England in 2012 has not reversed the decline in small-business lending in that country.
"Nobody's hiring, nobody's investing, nobody's spending," said Stefano Micossi, the director general of Assonime, an Italian business group. "There is no demand for credit. The system is not constrained by the funding side. The banks are awash in liquidity."
Japan, which has been grappling with the problems confronting Europe for more than two decades, is also seeking growth through currency moves. Under the "Abenomics" stimulus campaign that Prime Minister Shinzo Abe began in early 2013, the Bank of Japan has agreed to double the money supply, and the price of yen in dollars has dropped by about 24 per cent.
©2014 The New York Times News Service