A few thoughts on the new Fed stimulus

I have just stumbled across a very interesting news item in Der Spiegel: in short, it sums up how Germany's Economics and Finance Ministers, namely Mr. Brüderle and Mr. Schäube, sharply criticize the fresh $600 billion stimulus -- or, in other words, the new quantitave easing round --  that Ben Bernanke, the Fed chairman, announced just a day after the crushing defeat the Democratic party suffered in midterm elections.

They claim -- arguably not without a reason -- that such a move by the U.S. will have 'harmful' effects on other economies, as pumping money into the economy (i.e. printing dollars and using them to buy government debt) can only devaluate the affected currency, which happens to be the default reserve currency all over the world -- sorry about that, Euro! However, it really looks like that these criticisms -- quickly backed by Chinese, Japanese and Brazilian monetary authorities -- are just a way to show frustration by other major players in the thriving currency and commercial wars we are witnessing. 

Facts are facts. First, the European Union is also "bailing out" Greece (and maybe soon Ireland) with its own rescue fund (i.e. a system to buy Government bonds nobody would otherwise have bought at reasonable interest rate). Of course, Germany is concerned that further devaluation of the dollar will only mean the strenthening of the euro, and this could obviously hurt Germany's export-oriented economy. However, the U.S. is also fighting to export its way out of the recession, and is using all the tools it has to do so, both diplomatic and economic.

China has been doing that for years, although using a very different system: buying massive quantities of U.S. debt allowed it to keep the yuan undervalued while investing its growing trade surplus in a secure way -- while letting Americans overborrow and creating the explosive conditions that led to the 2008 financial meltdown. Of course, now China is worried about its trillions of USD-denominated assets: their real value will fall due to the devaluation of the dollar, and interest rates will also go down, so yields will also fall.

But just as the image on the left shows, quantitave easing measures also mean that the Fed is rolling the dice itself: what today might be considered necessary to reduce the mounting piles of U.S. public debt and, therefore, reduce the interest rates the Government has to pay to finance it (which only add to the approx. 10% Federal budget deficit), could turn itself into excessive inflation in the mid-term and even cause another asset bubble, akin to or worse than the one we are still trying to recover from. However, given the current state of the American economy and the latest inflation -- should we start talking about deflation, indeed? -- data, this is quite a long shot.

Are Germany's concerns legitimate? Of course. Are they exaggerated? Probably. Germany's competitiveness is not based on being cheaper, but on producing highly specialized, reliable top-notch equipment. Yes, they must also be cost-competitive, but that's not the key factor here. Germany has already exported its way out of the crisis with their old, proven formula of quality manufacturing, hard work, high productivity and moderate pay raises.

Are China's concerns legitimate? Yes. Are their criticisms fair? Not so much. There will obviously be a 'spillover', as China's central bank head, Mr. Zhou Xiaochuan, affirmed. However, probably he could not deny that the huge trade surplus his country has accumulated also has negative effects on the global economy, hurting its balance and slowing growth elsewhere.

Therefore, while it might hurt others and it can indeed be harmful for U.S. foreign policy interests, we have to respect and understand Mr. Bernanke's decision. The U.S. is just using the extraordinary tools it has, leveraging its privileged position in the world economy to try to revive its economy. Who, in his right mind, would not try to mend his own problems with all the tools he has? Well, then: wish them good luck, hope for the best... and try not to be too envious!

Short update: It looks like Mr. Paul Krugman agrees with me in criticising the hypocrisy / envy of some foreign governments and also in downplaying the risks of an inflationary spiral. Read his op-ed in The New York Times.