Just minutes after the conclusion of the G-20 (Group of 20) summit, President Obama said to a group of reporters in Seoul, “[The Chinese yuan] is undervalued. And China spends enormous amounts of money intervening in the market to keep it undervalued.” And in defense of the Federal Reserve’s decision to buy $600 billion in Treasury bonds over the next eight months in a bid to boost a sluggish U.S. economy by expanding the money supply, Obama said, “The Fed’s mandate, my mandate, is to grow our economy. And that’s not just good for the United States, that’s good for the world as a whole. The worst thing that could happen to the world economy...is if we end up being stuck with no growth or very limited growth.”
Chinese officials, though, see it differently. Chinese Vice Finance Minister, Zhu Guangyao said the Fed’s plan is to “shock” emerging markets by flooding them with capital. “Around the world, we have $10 trillion of hot money flowing around, more than the $9 trillion in hot money at the beginning of the global financial crisis.”
And Zhou Xiaochuan, governor of the People’s Bank of China, told a Caixin financial conference on Friday, November 5, that the Fed bond-buying announcement now roiling emerging markets, including China’s, “is not necessarily optimal policy for the world,” and that China has its own “administrative measures to block the flow of this hot money.”
But Tony Crescenzi, a strategist at Pacific Investment Management Co., manager of the world’s largest bond fund, said in a November 10, 2010, Bloomberg interview regarding Fed quantitative easing (QE2) and the ability of emerging markets to control capital flows, “Money will flow to where opportunity is best,...so there will be a limit to the extent that these countries can control capital flowing in, except through financial assets, and even there, there will be limits on how much they can control.”
Similarly, Isaac Meng, an economist at BNP Paribas SA in Beijing, said that in spite of Chinese efforts to block capital inflows, “strengthened controls on hot money can’t change the yuan’s trend of appreciation. The yuan will continue to appreciate as the Fed easing prompts more capital inflows and China’s economy grows faster than the U.S.”
Indeed, then what is the true intent of QE2? Axel G. Merk, founder and portfolio manager of Merk Investments, says that “QE2 is akin to the Fed placing a gun to China’s head, telling them to revalue their currency.” For this onslaught of hot money will bring about the two most dreaded challenges for China: inflation and a rising yuan, both of which pose significant risk to China’s economic growth and social stability, unless it earnestly fosters stronger domestic demand.
Will QE2 be effective in moving the Chinese yuan away from the U.S. dollar? Yes, it will. Simply put, China has neither the monetary firepower to respond, nor the financial infrastructure to withstand a dollar deluge, nor a people with the willpower to resist easy money. At the end of the day, the Fed will force China’s hand in revaluing its currency. With the 1.3 billion people this socialist government seeks to manage, the inflationary pressure will become too much to bear.
Meanwhile, the Chairman wears his poker face as he conveys all evidence to the contrary. In defense of monetary policy decisions, he said on November 6, “This sense out there that quantitative easing or asset purchases is some completely far removed, strange kind of thing and we have no idea what the hell is going to happen, and it’s just an unanticipated, unpredictable policy – quite the contrary. This is just monetary policy.”
U.S. and international consensus against quantitative easing conjures the notion that the Fed’s mandate to achieve price stability and maximum employment has as much to do with QE2 as WMD (weapons of mass destruction) had to do with the War on Iraq – for just as the arguments for the existence of WMD justified regime change, so the Fed’s mandate warrants this overwhelming torrent of capital into emerging markets to actuate the depegging of the Chinese yuan from the U.S. dollar. And just as WMDs were not found, neither will price stability or maximum employment be achieved through QE2.
What will QE2 mean for Americans? 1) Higher import prices, as this flood of dollars dilutes the value of the currency. Exporters to the U.S. will demand more dollars for the same quantity of goods and commodities; 2) Americans will have to learn to get along with less and seek higher value; and 3) our friends around the world will be angry with us for some time. Members of the international community think it is grossly unfair for the Fed to yank the dollar around through near-zero interest rates and high-velocity easing while seemingly ignoring the fact that it holds the position as the world’s reserve currency, as two-thirds of all international trade is settled using U.S. dollars. They are frustrated by these destabilizing decisions, which are wreaking havoc on economies, global markets, businesses and families. Be assured, finance ministers and central banks around the world are working on plans be reduce their dependency on the dollar so that they will no longer be forced to tolerate such a situation again. As there is now no practical alternative settlement currency, the Fed had better move quickly in its monetary-policy efforts before the world comes up with a credible Plan ‘B’ that meaningfully marginalizes the U.S. dollar and Fed policy.
What the Chairman calls “just monetary policy,” others may call “monetary warfare” with currency regime change its primary objective. Fed Chairman Bernanke indeed knows exactly what he is doing. However, governance and politics make transparency inconvenient. As the saying goes, “It is difficult to be clear when clarity is what you are trying to avoid.”
