QE2: When the United States inflated a housing bubble, it got itself into trouble. Now it is blowing bubbles abroad, and may get the rest of the world into trouble. That is how some emerging economies regard the US Federal Reserve’s decision to print another $600 billion by mid-2011. Their anger is an inauspicious backdrop to next week’s G20 summit. The United States may now find it harder to get cooperation on the yuan and global imbalances.
Self-interest and global interest are colliding. There is resentment in America about high unemployment and the perceived culpability of the cheap Chinese yuan. The Fed has acted in what it sees as America’s interest. The US economy is recovering, but slowly. Its new money-printing might be seen as a big insurance policy: stimulate now and we definitely won’t become like stagnant Japan, seems to be the view of Fed chairman Ben Bernanke. Patience might have been better but Bernanke’s fear of not doing enough is understandable.
More dollars, however, mean weaker dollars. The rest of the world will naturally protest that US is being hypocritical in preaching against currency wars. The falling dollar, moreover, has unfortunate side effects such as commodity price inflation. In India and China, food prices are rising too fast. The Fed’s actions will fan that. Emerging-economy asset prices are also inflating. These economies don't want a flood of cheap foreign money flowing into equities, bonds and property. Brazil has imposed taxes on foreign investment in bonds; South Korea is muttering about capital controls. Emerging economies know the flow will eventually recede — and may leave burst bubbles behind.
The Fed’s timing could hardly be more unfortunate. When G20 leaders meet next week in South Korea, many of them will decry the Fed’s new easing. That risks distracting attention from the fact that the yuan is pegged to the devaluing dollar, while the euro, yen and other emerging economies soar.
Well, you act in your interests, we act in ours, China can say. The United States won’t have much answer to that now.
