Will QE Get us Anywhere We want to Go?

There is a thin line between rivalry and cooperation in global markets and monetary policy.  One country’s QE is another’s currency manipulation. Gold hit $1400+ per troy ounce as markets reacted to QE2 and the major exporters either whined or salivated depending upon whether their products were denominated in dollars.

President Obama is in India this week on a trade and global finance trip capped off by a meeting of the G20.  It is good he is there because America has a key role to play in that region and across the global economy.  It is also good for the President because after the ‘shellacking’ he took in the mid year elections the world needs to take a new sounding of his authority, focus and resolve.  Let’s hope he does not apologize for something this time.

CURRENCY WHEEL OF FORTUNE

I don’t pretend to be any kind of global finance expert but it strikes me that we are playing a risky game of geo-monetary chicken.  By ‘we’ I mean not just the US but Europe, China and much of the developing world.  The game works like this:

  • The crisis has past now we must face the music. The emergency in the financial markets we plunged into in 2008 has largely past but the damage is still apparent with high unemployment, uncertainty among business and investors, and a jockeying for competitive advantage among the big players.  America’s high deficits are a cause of serious concern at home and abroad, but so is China’s voracious appetite for everything especially market share growth from exports.
  • Currency gotcha! The more the dollar is worth in currency markets the better it is for commodities traders like Saudi Arabia because most commodities are sold in dollars.  But higher oil prices hit consumers here at home.  On the other hand, a lower valued dollar makes US exports cheaper in international markets and many US companies now make a large share of profits in international markets thus a lower dollar, theoretically, encourages US business growth.
  • Chinese Checkers. The biggest dance in the currency equivalent of Dancing with the Stars is the competition between China and the rest of the world.  China is accused of manipulating its currency to make its exports cheaper in global markets to enable its economy to grow faster than the rest of the world thus accelerating China’s economic power in global markets.  China also fears that a material slowdown will cause social unrest and put undue pressure on the Communist Party to allow more political reforms.
  • Reserve Currency Strikes Back! Meanwhile, the US and EU believe China is undercutting manufacturers to grow market share for its exports.   While China seems capable of vacuuming up virtually any market for any product in any country it chooses, it refuses to be bullied into allowing its currency to rise more than modestly so the Federal Reserve is taking action called “quantitative easing” to drive down the value of the dollar to both stimulate US business growth, avoid deflation and constrain China’s growth rate.  Will it work?  Bernanke’s shell game is designed to encourage business to spend, raise prices just enough to stimulate hiring and growth, but not enough to unleash the monsters of inflation.  Oh and there’s one more thing—this is a warning to China and Germany not to assume that we will keep taking it on the chin for them.

Why does all this matter to the typical American?

Grow or Die!  America needs to grow faster, reduce unemployment and get business to spend some of the $1 trillion in cash business is hoarding.  America needs to grow faster because we are the market for the world and a rising tide in America lifts all boats. President Obama is desperate for better employment and growth numbers because it is key to his re-election prospects.  America also needs growth because it is the fastest way to reduce our deficit and mind-numbing debt levels and restore our competitive advantages.

But we also have global leadership responsibilities and to live into that role we have to take decisive action not only to get our own economic act together but to keep everyone else doing their part.  The actions the Fed is taking to buy treasuries will put pressure on exporting countries like China and Germany and may be a major distraction for the rest of the developing work that counts upon a benign America to allow access to US markets for their products and services without requiring them to actually do anything in return.

The world is trying to discern whether the Fed knows what it is doing—and whether it will work to stimulate growth without driving inflation through the roof. If the Fed signal is that the US is going to proactively manage the value of the dollar to restore a sense of competitive balance in trade that is sustainable and fair then that would be good.  If, on the other hand, the Fed action in using one of its last resort cards in quantitative easing is all we do then we’ll both waste the card and not create the sustainability we need.

In short, monetary policy is good but not sufficient to cure the patient of this economic malaise.  We need a good dose of good business policy, low and certain taxes, and an end to social re-engineering by Congress in healthcare, energy and banking to unleash that $1 trillion of cash business is hoarding to create jobs.  The ‘shellacking’ of the Democrats in the mid-term election is a clear sign that Americans see the danger and are engaged in the process of righting the ship of state to get the country and our economy back on course.  Now we need to figure out whether the Republicans are good samaritans or pirates in this process of reinvention and renewal.

For typical Americans anxious about jobs, economic growth and the direction of our country we’re trying to read these geo-economic tea leaves.  While we believe in competitive markets we fear that “competitive” has come to mean take advantage of America.  That must change and if it takes a warning shot across the bow to major exporting countries that we ‘really mean it’ then this strategy is prudent.

America’s is not alone in concerns about global competition.

In Australia, for example, electricity rates for residential customers have spiked 12.4 per cent in the past year, four times the rate of inflation. Some of this is the result of environmental policies on greenhouse gas emissions reduction and expanding renewable energy that are much like Europe and the US.  But increasingly, Australian worry that it is caused by trade policies that result illogically in Australians now paying more for power than manufacturing competitors do in countries to which Australia ships its coal.  For those reasons and others, the Australians threw out their prime minister’ shellacking’ his policies—to coin a term.

Or as one outback wise guy put it, “We’re selling the Chinese the coal used to produce the steel they turn into knives to slit our throats.”

The Energy Users Association of Australia lamented that power prices were on track to double within five years and triple within a decade as utilities spent billions of dollars on infrastructure to meet growing demand, but instead of using the cheapest resources available the Australian government was forcing them to buy 20% of their energy from renewable sources by 2020

Or Put yourself in China’s shoes.  China’s amazing economic growth has been fueled by its ability to be a low-cost exporter of goods.  With lower levels of per capita GDP, China was able to grow faster than competitors.  But now China’s economy is now much larger and its success raises expectations inside China and is creating a growing middle class and wealthy class adding many thorny problems for political leaders.  This year China surpassed Japan to become the world’s second largest economy.  If China allows growth to slow down it fears domestic unrest, if it does not it risks geo-political backlash.

But China’s success also forces it to live into its emerging global leadership role as well meaning it can’t be a one way street anymore where the rest of the world accepts China’s exports while China limits the market potential of the rest of the world inside China.

What goes around, comes around as the saying goes so Vietnam and a score of other places are learning their Chinese lessons and positioning their economies to be more attractive than China for manufacturing the world’s products thus bleeding off China’s export growth.  And the more countries compete with China the more they fear China and need the United States for its markets and its umbrella of protection.

What about the Europeans?  Forget them, everyone knows you can’t count on Europe.  The global game is being played for access to American markets and technology by China and other developing countries that want a piece of the action—a big piece—to sustain their export growth.

AMERICA HAS CHOICES

Playing the currency game is just part of ‘hitting the reset button’  designed to get back to balance.  The real game is the choice between a continued and growing dependency on China and other voracious exporters to supply our every need and take our dollars—-OR will we now act to reform of our tax laws, incentives and policies needed to restore a sense of ‘made in America’ balance that makes it once again profitable to make stuff here at home, bring home profits from international markets, and turn those profits into invested capital leveraging technology, skilled workers and reasonable regulation and cost structures to sustain it.

The genius of America has always been our capacity to reinvent ourselves for what’s ahead.  Between now and the 2012 election America is pondering its future—and its time to’ man up’ to our responsibilities and our potential.

Let’s do it!

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