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Ready to Fight?
News From Around the World
Monday, November 15, 2010
Ed DeShields

The first Fed bailout of America was largely aimed at shoring up the balance sheets of banks.  The second and latest round is purely about printing “thin-air” money and shoving it into the economy.

So what’s so wrong with the idea that on top of the $1.7 trillion in stimulus out there the Fed is pumping in another $600 billion to get the economy rolling again?    Let’s get to that answer in a moment.   But first, let’s take a look around the world. 

The OECD (Organization for Economic and Cooperation and Development) countries consist of 33 members that act to coordinate the world’s economic activity.  OECD members are set to borrow a monstrous amount of money next year to help turn their economies around.   The problem is that the United States, with its new stimulus package called Quantitative Easing (QE II) has other members furious.  Turns out the U.S. decided to “jump the gun” and flood the system with cheap dollars.     

The German finance minister called the Fed's application of US monetary policy "clueless" and argued that the Fed decision would "increase the insecurity in the world economy."  China was predictably unhappy too, but initially used more diplomatic language which, by the way, quickly turned into more blunt words like “absurd”. 

The OECD felt double-crossed by the Fed’s printing of so much money.  They worry it will show up in the form of inflation but not just in the U.S. but around the world.   Much of the first stimulus, QE I, helped propel the commercial building bubble in China.  They currently have their hands full trying to cool it down before it bursts.  

Brazil retaliated by buying dollars attempting to push its value higher – and with it, boost prices for American imports to Brazil.  Xia Bin, a member of the Chinese central bank's monetary policy committee, branded the US stimulus plan "abusive" and warned it could spark a new global downturn. German finance minister Wolfgang Schäuble accused the US of breaking the promise made at June's G20 in Toronto, saying he would "speak critically about this at the G20 summit in South Korea."  He did. 

Just two weeks earlier, G20 finance ministers at the warm-up summit in Gyeongju, South Korea, had pledged to refrain from competitive devaluation and Tim Geithner, the US Treasury Secretary, had promised the US would retain its "strong dollar" policy. They didn’t.  At Seoul, the US faced harsh accusations of empty rhetoric with President Obama denying the whole affair.

The harmonious language of hope at the Pittsburgh summit has now given way to something brazenly belligerent. The Brazilian President, Luiz Inácio Lula da Silva, declared he would go to the G20 meeting in Seoul ready "to fight."

Unfortunately we have little to no choice left but to print.   And, our economic partners have no choice but to retaliate as the Fed pushes the dollar lower and uses it as a competitive economic weapon to rebalance our trade deficit.  Like the life boats on the Titanic, as it was tragically learned during that crisis, there are but a few available options during a crisis and there is plenty of consequences.   

It brings to mind the misguided economic policies that occurred surrounding the First World War, which contributed to the financial collapse that brought about the Great Depression.  We now know that these polices brought about increased import duties and competitive devaluation of currencies among the leading industrialized nations.  These protectionist measures were contributing factors to the onset and severity of the Depression.  They also helped propel Adolf Hitler into power in Germany and hence had horrific outcome beyond mere economics. How did we get into this mess?

The experience of the 1920s and 30s taught our parents’ generation that economic nationalism is a double-edged sword.  Competitive devaluation of currencies around the world was a key cause of World War II.  Recent events seem to indicate this is one lesson this generation has either forgotten or is prepared to reject, with plenty of unknown consequences for the future.

About Ed DeShields

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