The next G-20 meeting should be interesting. The Fed is intent on buying more of its assets and unleashing more paper money into the already oversupplied financial systems. This has governments and central bankers of emerging markets very worried, particularly those whose red-hot economies are potentially about to get $600 billion redder if the Fed goes through with the purchases of its longer-term debt. Such a massive influx of money supply is likely going to depress the U.S. dollar even more and further erode U.S. manufacturing and exports.
What the Fed is trying to do, allegedly, is give the U.S. recovery a boost by keeping the interest rates low as an incentive to Americans to keep on spending. As a by-product, the equity and commodity markets are rallying, while the U.S. dollar is sinking along with U.S. government bond yields. At the same time, the rest of the world is barely containing the tensions around the foreign-exchange policies, which just may have reached the boiling point. In such an environment where almost every member of G-20 is working out its own currency policy, how on earth is the G-20 supposed to come up with a unified decision?
Emerging Asian markets, which have produced growth rates that the developed economies have not seen in decades, are calling for a coordinated response of all central banks in the region to take measures that will limit excess money supply from entering their capital flows. In addition, emerging markets appear to be done with the U.S. rhetoric, particularly China, which feels it has been chastised for not allowing its yuan to float freely one time too many.
China’s central bank is accusing the Fed of potentially unleashing another global crisis with its indiscriminate money printing. And, to counter that, China is likely to band together with other emerging markets’ governments to push for adoption of the yuan as the international currency instead of the dollar. I don’t think we’ll be seeing the yuan dethrone the greenback as the world’s reserve currency anytime soon, but what we may see is China using the U.S. QE2 as an excuse to keep its currency in check despite the development economies’ outcries to let it float, primarily up. Then again, why would China let the yuan rise and destroy its export-oriented economy when the U.S. doesn’t want to consider financial austerity and opts for more quantitative easing instead?
This “my-policy-is-better-than-your-policy” pissing contest is not only causing friction, but it has also degenerating fast into full-blown currency wars and international trade disputes. It also has it in its power to cripple the global recovery. Of course, no one is willing to budge, not even a bit. If the Fed believes that quantitative easing is what the U.S. economy needs, perhaps we should give it a go. The easiest thing to do is to stop pursuing a policy that doesn’t work. In addition, the U.S. shouldn’t put too much pressure on China’s currency policy. If the yuan starts rising too fast and this export giant stumbles, the entire global economy could be in much bigger doo-doo than the crash of 2008 and the recession of 2009.