My economics professor told me that "money always seems free in time of an economic crisis." Although it was 17 years ago, I still remember to this day. At that time, I did not know what it meant or at least I did not realize its implications.
Known as QE2, the Federal Reserve is serving a continental buffet to fight against deflation expectation and high unemployment. Indirectly, the fed is supporting a cheaper dollar. They want a favorable terms of trade, higher exports to stimulate domestic growth, and a higher stock prices. Hopefully, the cheap money will trickle down to stimulate aggregate demand to the "man on the street".
So far, domestic and international stock market indexes around the world are up. Investors are happy to be invited to this free buffet. However, is it really free?
Experts argue that it will drive up prices of commodities, which eventually will rears its ugly inflationary head. Emerging market economies are operating at full potential and employment and fear of an overheating economy. Brazil instituted capital controls and others are finding ways to do the same.
Furthermore, the German Bundesbank President called the Fed "clueless."
Hopefully, everyone donates a little to the buffet so it is not a total economic lost.
Though politically more costly, I rather prefer when they spend the money directly with 'stimulus packager' instead resort to 'currency manipulation' by turning on the printing press or do a 'FX intervention'. At least When they spend the money directly, they can spend it area when they can improve their efficiency and productivity. When they manipulate or intervener, the best scenario is a small group of investors profit and in the long run it is ineffective. More likely, as inflation hits, the gain for those investors prove to be temporary and unreal, but the lost by average worker in their purchase power is permanent and real.
ReplyDeleteBuffet are tough to digest and eventually always end up in the pooper :)
Supporting fiscal stimulus in the investments of infrastructure, human capital, science and technology do not have the short term "bang" to the economy which is required now. The fed can do mostly short run stimulus policies.
ReplyDeleteHowever, fiscal policy in the long run, the American Recovery and Reinvestment Act of 2009 does some of the direct money spending that you are advocating.
Since export is a minor component of US economy, this move will only hurts countries that export to United States. Mostly, it will be punishing for Japan and Europe. Though countries like China and Mexico will be affected, the effect will be muted because US no longer have competitive manufacturing capability for products they import from these countries, i. e. This move will stoke US inflation instead. How is tis benefiting US citizens?
ReplyDeleteUnfortunately, Japan and Europe do not have the capacity to match move with United States, have had fired their shots to deal with their recent troubles. Right now, Both economies are fragile and might not be able to withstand taking a hit like this one; furthermore, this unilateral move have damaged the feeling of cooperation among the key economies. What happen if this trigger another crisis? Who will and can stand up to stop it? With what? How will this benefit US?
I have to agree with Germans...it doesn't pay to be friends with US :)
From my understanding, the economic policy of the Obama Administration is to drive growth through exports and investments and rely less on consumption spending. The weaker dollar should relatively help reduce imports and the savings from that will in the long run fuel investments.
ReplyDeleteIt looks to expand exports as a part of the economy.
US Treasury Geithner will discuss in the coming G20 meeting on the progress of the policy of readjusting the imbalance of global trade in terms of current account.
Current account surplus countries like Japan, S. Korea, China, and Germany will just have to import more.
It is in the interest of every county to cooperate. If cooperation is weak, then world growth will not be as strong as it could be.
The current Account Surplus countries have the surplus because they produce superior products, or have labour cost advantages, or developed efficiency advantages.
ReplyDeleteHow would currency devaluation help US to improve it's efficiency or to innovate to produce more desirable products?
How is it in the interest of those countries to cooperate?
[I am not disagreeing with the idea of cooperation and freer trade will promote stronger growth, but this move by the fed is the exact opposite of cooperation and free trade. One aspect of it is disguised protectionism.]
There's pros and cons to direct stimulus and QE. With stimulus package, the govt decides where to spend the money and can invest in areas that private enterprise isn't involved with, such as public works, big science, etc. QE theoretically allows private enterprise access to money where it needs it, and again the hope is that this funds small to medium-sized businesses, as well as private loans.
ReplyDeleteObama won't be able to convince Congress to fund any more stimulus packages, especially with the Repubs winning more seats and governorships. That's why the American's only hope is QE2 .. the Fed is immune to political interference. Unfortunately, there's no control of where this new money is spent, but part of the Fed's plan is simply to increase inflation, so they almost don't care :)
There's too much debate of which tactic is better: stimulus or QE. Why choose? Ideally they should do both and let the economists do the analysis afterwards :) But as I mentioned, Congress won't allow any more direct funding schemes.
I don't agree that direct stimulus can't be a short term injection to the economy. In fact, it can be faster than QE because the banks and investors are a funnel that may hold the money or spend the dollars overseas. What the govt could do is provide direct grants, loans, and tax credits (such as Canada's home improvement tax credit last year which stimulated the construction, interior design, and home furnishings industries) but again, there is fierce resistance in the States against anything that looks remotely socialist.
Having experienced living in Germany and Japan, I can say that their markets are very closed to U.S. services and products, especially agriculture. I believe that government policy makers in both of these countries do not trust the free trade and markets openly, at least not to the extent in which Canada and America have embraced it. Even within Europe, they buy their own's country products and services.
ReplyDeleteIn some industries, we have fallen behind like the auto industry. However in others, we are still the leader because no other country can innovate like America. The world has benefited from that.
Trade is a two way street. America has for too long, under the goodwill to help Japan, S. Korea, Germany, France, England, and Italy after WW II to trade with them to promote a capitalist system. Of course, everyone benefited.
That current account imbalance has gone too far and it is now up to the trade surplus countries to step it up and reciprocate that goodwill.
I don't think the rest of the world agrees that U.S. acts merely out of goodwill to encourage free and balanced trade. In fact, history shows otherwise.
ReplyDeleteThe U.S. also does not have free trade and markets in agriculture. American tobacco, corn, and sugar are heavily distorted markets and not free at all. The U.S. routinely enacts protectionist tariffs in other markets such as steel and lumber.
Canada has wheat and dairy boards that dictate prices and what farmers can grow and sell.
I'd say America has fallen behind in most industries, which is why it runs a trade deficit. Although U.S. holds the greatest share of patents in the world (as a measure of innovation) with 30%, Japan is closely behind at 28%. The small gap is closing too, because Japan has more patents granted than U.S. (2008 latest figures. Source: WIPO June 2010). And since Japan's population is so much smaller, I'd say that Japan is a much more innovative country than U.S.
This is an interesting article about Germany's labour policy and it's effect on trade: http://www.washingtonpost.com/wp-dyn/content/article/2010/11/23/AR2010112306280.html
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