The move is a boost to the U.S. economy but risks creating new capital bubbles for other countries.
The U.S. dollar is the most widely held reserve currency in the world today. The devaluation of the U.S. dollar plus an overly loose currency policy that leads to a sharp increase in capital flow will drive large amounts of hot money to newly emerging economies in search of profits.
The International Monetary Fund (IMF) has recently warned that Asia and other emerging markets are facing the double risks of a huge influx of foreign capital and an accumulation of inflation pressure.
Chinese Commerce Minister Chen Deming has also pointed out that "out-of-control" U.S. currency issuance and big international commodity price hikes would probably saddle China with imported inflation.
Ironically, one of the factors driving big international commodity prices up is the depreciation of the U.S. dollar, the main global reserve currency.
In the past few months, a vicious cycle of currency flow became obvious. The Fed launched a round of quantitative easing, causing an overflow of capital (hot money pooled in other countries). This led to imported inflation jeopardizing the economies of other countries, which were then forced to intervene in the foreign exchange market.
From the U.S. perspective, the purpose of increasing liquidity is to inject life into its faltering economy. But the direct consequences of the move might be disastrous to other countries. It might even drag others into financial turbulence.
Some economists did not rule out the possibility the U.S. government was deliberately waging a currency war by quantitative easing, depreciating the dollar, shifting the economic risks to others and pursuing the bonus that comes from having a reserve currency.
According to a report from the Organization for Economic Cooperation and Development (OECD) on Wednesday, continued loose monetary policy in many advanced economies will prompt capital to flow to emerging ones where it risks creating asset bubbles while putting upward pressure on their exchange rates.
OECD Secretary General Jose Angel Gurria said bubbles were generated in the emerging economies, which "still have a high level of inflation or ...(face) pressure of inflation," when advanced economies took advantage of their weaker and more restrictive monetary policies.
Nobel laureate Joseph Stiglitz said that, when trying to reignite the U.S. economy by printing money, the flood of money was almost surely contributing to global financial instability and prompted countries worldwide to intervene. And the result was a "more fragmented global financial market."
Last month, G20 finance ministers and central bankers promised in a joint statement to "pursue the full range of policies conducive to reducing excessive imbalances and maintaining current account imbalances at sustainable levels."
During the China-U.S. strategic and economic dialogue in May, the U.S. also vowed to adopt a proactive currency policy and pay attention to the impact of its currency policy on the international economy.
The reason why the outside world follow the attitudes of advanced countries so closely is that they are the source of the rivers of hot money.
Whether the world economy can achieve a sustainable recovery largely depends on whether the main global reserve currency countries can put into practice their promises to keep exchange rates comparatively stable and reduce the negative spill-over effect of their currency policies.
At the time when the world economic recovery is still unstable, it is an unshirkable task for the main global reserve currency countries to adopt responsible currency policies for the benefit of all.
Source: Xinhua
Newscribe : get free news in real time
-
Lamy: Currency no tool for trade imbalance
The World Trade Organization is warning the vulnerable world economy could be hit hard, if the curre... -
Tele interview: Why did ECB, BOE shun US Fed´s path of economic stimulus?
Both the ECB and BOE kept rates on hold. But they shunned the US Fed´s path of more economic s...
-
Tele interview: Impact of ECB and BOE´s decisions on interest rate
The European Central Bank has decided to keep interest rates at 1 percent for the 18th consecutive m... -
Economists skeptical about QE2 effect
The US Federal Reserve has launched fresh efforts to support a struggling economy, committing to buy...
-
Pascal Lamy: Devaluation may affect world trade and shake economy recovery
As the world economy slowly recovers from the financial crisis, several countries are in dispute ove...
Studio discussion: How will other central banks react to Fed´s QE2?
The European Central Bank, Bank Of England and Bank Of Japan all hold policy meetings today. So unde...-
Tele interview: Will QE2 trigger further devaluation of USD?
Will QE2 trigger further devaluation of the dollar and lead to a volatility in the currency markets?... -
Studio discussion: Will QE2 create asset bubble?
By giving stocks a boost in the near future, will the plan create an asset bubble?...
U.S. Fed to buy 600 billion dollars in bonds as quantitative easing, Dollar tumbles!
1 comment:
True, USA policy is asking China to manipulate the renminbi's exchange rate, and it is something that China will of course not do!
Post a Comment