QE2 Backlash

Well I told you so.

The rest of the world, or rather a vocal subset thereof, are making all sorts of interesting negative comments about our venerable QE2 which is scarcely a day old. Rarely has a policy action been so derided by our fellow global citizens.

The Germans call it ludicrous, and the Chinese call it dangerous.

Maybe it’s both.

QE2 is just another example of how timid America has become in the face of its larger than life problems. Yes it’s weak. Yes it’s too small. No it won’t work well. And, well, the Chinese and Germans are sort of right.

Our problem is not their reaction, that was inevitable. We have punted on our economic policy and made our problem their problem. The Germans are in denial about their contribution to the implosion of Europe, they imagine they can continue exporting forever, under inflate their own economy and flood the world with the inevitable savings surplus their restricted domestic policy foists on the world. Their entire policy is built around there being willing debtors to take in their overproduction. The Chinese just cheat. They refuse to allow their currency to float so it dampens their domestic economy and reduces their trade surplus. The consequence is that all those Chinese workers hustle away, take jobs from other economies, but don’t get to enjoy the full fruits of their labor.

So when those carefully crafted policies are disrupted by our efforts they get annoyed.

Let me just explain this again.

All that cash the Fed is pumping into the economy – at around $75 billion a month – will end up in the hands of investors. They will have to make a decision what to do with the cash. Some, but not all, will ship it off to foreign climes where there are plenty of attractive and high rates of return. Good for them. But. That influx of dollars into those foreign economies will cause the local currency to rise. Usually exporting countries don’t like that. It dampens their growth. Since they have economies geared towards exports and not consumption this all screws up their policies. So they try to devalue their currencies or introduce policies to offset the dollar influx.

The net of all this?

A bunch of annoyed foreigners. A round of tit for tat policies. A reduction in global growth rates. The nullification of a part of the Fed’s plan – the dollars did nothing for our economy. And a lot of arguing.

File all this under the general heading of why QE2 is a poor, very poor, substitute for real policy. That would be stimulus. But we won’t get that.

On second thoughts all those annoyed foreigners may just be upset we can’t get out of our way. As long as America dithers about in tepid and negative policy land the entire world runs more slowly.

They have a right to be upset.