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,
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:
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.
impending clash could bring about the dissolution of the present trade
regime and a sharp reversal of 30-years of globalization.
Unfortunately, China is not cooperating. It's piling up foreign exchange reserves at record pace to maintain the dollar peg which is widening the current account deficit to pre-crisis levels.
The yawning trade
imbalance is pushing the world towards another crisis, which is why Bernanke
and Co. are determined to persuade China to let its currency to appreciate
to narrow the gap. (China's foreign exchange reserves surged to $2.65tr in
the 3rd quarter)
A free-floating currency helps to level the playing field (even if US labor is competing with some of the world's worst paid workers) Bernanke's announcement last Friday, is just the first shot fired over Beijing's bow.
There will be more to come. This weekend's meeting of the G-20 provides Treasury Secretary Timothy Geithner with the perfect opportunity to put the spotlight on China and to rail against currency manipulation.
Many expect him to make a strong statement demanding changes to the policy. An update by Reuters on Wednesday confirms the US position.
Here's a blurp:
Neither the Obama administration nor the Fed want a full-blown trade war with China.
They'd rather see China “assume its position in the global system” (as US diplomats aver.) But that means that China will have to compromise on, what it considers to be, a matter of national sovereignty. And, there's the rub. China is a proud nation and doesn't want to be told what to do.
But that's not how the system works. Behind the facade of free markets and international institutions, lies an imperial system ruled from Washington. That leaves Beijing with two options; they can either bow to US pressure and fall in line or shrug off Washington's demands and continue on the same path.
If they choose to resist, relations with the US will grow more acrimonious and the probability of conflict will rise.