The United States conducts monetary policy the same way it conducts foreign policy; unilaterally. When Fed chairman Ben Bernanke signaled last week that he was planning to restart his bond purchasing program (Quantitative Easing) he didn't consult with allies at the IMF, the G-20 or the WTO. He simply issued his edict, and that was that. The fact that the Fed's policy will flood emerging markets with cheap capital, pushing up the value of their currencies and igniting inflation, is of no concern to Bernanke. He operates on the same theory as former Treasury Secretary John Connally who breezily quipped to a group of euro finance ministers, “The dollar is our currency, but your problem.”
Bernanke's 15 report could have been reduced to nine words: Inflation is too low and unemployment is too high. That said, Bernanke is not going to sit back hemming and hawing until congress figures out that the economy needs more support. He's going to put downward pressure on the dollar until inflation rises to the target 2%, increasing the prospects for lower unemployment, a narrowing of the current account deficit, and a faster rebound. Economist Edward Hugh sums it up like this:
“Unemployment in the United States (which is currently at 9.6%, and may reach 10% by the end of the year) is causing enormous problems for the Obama administration. The US labor market and welfare system are simply not designed to run with these levels of unemployment for any length of time. In Japan the unemployment rate is 5.1%, and in Germany it is under 8%. So people in Washington, not unreasonably ask themselves why the US should shoulder so much extra unemployment and run a current account deficit just to maintain the Bretton Woods system and the reserve currency status of the US Dollar.
My feeling is that the US administration has decided to reduce the unemployment rate, and close the current account deficit, and that the only way to achieve this is to force the value of the dollar down. That way it will be US factories rather than German or Japanese ones that are humming to the sound of the new orders which come in from all that flourishing emerging market demand.”
Bernanke has drawn the same conclusions as Hugh, but that doesn't mean his strategy won't inflict considerable damage on US allies. It will. His beggar-thy-neighbor QE program will force trading partners to implement capital controls and other protectionist measures to maintain price stability. QE will also lead to more competitive devaluation as the world's largest economies fight for a bigger share of the export market. The impending clash could bring about the dissolution of the present trade regime and a sharp reversal of 30-years of globalization. (Read more)