An International Showdown
Last week Reuters and The Vancover Sun reported (here) that a planning session of the G20 summit became so heated, officials had to physically open the door to the room, to cool things down. Tensions were allegedly ignited by global exchange rates. According to the article,
Critics charge that the Fed ignored global repercussions — namely a weaker dollar and a flood of cheap cash that could find its way into emerging markets — and violated the cooperative spirit the G20 has worked hard to sustain.
Since the Fed’s announcement, the dollar has regained its strength against both the Euro and the Yen but it still lags behind the Yuen, in terms of pre-QE2 strength. Recently, the United States and other nations vehemently criticized China for controlling the rise of its currency to maintain a trading advantage. In September, the U.S. House of Representatives even passed legislation allowing companies to request tariffs against the mega-power, as reported in The Economist, though the bill has still not passed the Senate. By mid-October, The Economist referred to the tension over monetary easing and currency as “Currency Wars.” “Gone,” the magazine writes in an October editorial, “is the fuzzy rhetoric about co-operation to boost global growth. A more combative tone has taken hold.” As the U.S. targets China for manipulating its currency, the Fed’s actions shows a willingness to buck diplomacy and follow China’s lead, in weakening the dollar. It is also an aggressive move, effectively forcing the Yuen to rise.
“Nobody touches us at all”
It’s a stretch to call QE2 “the bullet that killed the archduke,” but essentially the Fed told China to strengthen their Yuen or they would do it for them. Using its power to dictate monetary policy, the Fed bypassed any ideas Congress or the president had for international diplomacy. In the United States, we theoretically have a system of government of checks and balances, yet the Fed’s actions highlight a weakness in the argument. It is an incredibly powerful part of the government, controlling the U.S. economy and influencing the rest of the world. Last week, we also saw they have the ability to be a voice in effecting diplomacy, outside the actions of our legislative or executive branch. The president has limited power to select the members of the Fed, which serve 14 year terms and cannot be removed from office for their policy views according to the Federal Reserve website. Over the past ten years, the Fed has shown questionable judgment in dropping interest rates so low, they contributed to the mortgage crisis. As money grew cheaper, house prices soared.
Now, they have both set a precedent for other nations to begin a strategy of monetary easing and have given China a reason to keep it’s Yuen low. Nations may follow suit or take other measures to protect trade, yet free trade is essential to productivity and economic growth. But unless China maintains downward pressure on the Yuen, prices for Chinese imports will rise, putting more pressure on American families, as unemployment remains high. However, China has been under international pressure to let the Yuen rise to allow fair trade. Again this is vital for the long term, especially in emerging markets, but it is far easier to manipulate currencies than to wait for trade patterns to shift. The Fed needs to consider these global consequences instead of recklessly printing money. China needs to cooperate with us and using strong-armed tactics isn’t going, whether aimed at China or not, is not the best way to inspire their confidence in free market capitalism. Now is a time when it is essential for Americans to have access to a free market where prices for goods are forced to remain competitive and affordable, not be subject to a government restricting trade. Or a government that gives the impression it is not concerned about the global repercussions of their actions.
A fairly independent entity, the Fed has a great deal of power. Unless they are able to restrain their actions, the country may find itself in an all out currency war with China and the rest of the world.
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