THE UNNERVING FEDERAL RESERVE
My latest article is up at Frontpage.com and in it, I detail the worldwide reaction of disgust at the Fed’s “Quantitative Easing (2)” and how it is affecting our relations with other industrialized nations.
As other nations see it, the dollar is more than just the US’s currency, it is also the world’s reserve currency. This benefits the US economy because the greenback is constantly being propped up by the rest of the world, which doesn’t want to see the value of other currencies plummet. When the Fed takes drastic action, like creating money and pouring it into the financial system of the US, the resulting flood of cash makes central bankers nervous about inflation and governments worried about the export sectors of their own economies.
How long will the dollar be used as the world’s backstop currency? Not very long if China has anything to say about it. Zhou Xiaochuan, head of the People’s Bank of China, set off a wave of unease last year when he almost casually suggested that the world’s financial system could do better if it wasn’t using the dollar as a reserve currency. In a speech last Friday, Zhou revisited that theme:
We can understand the Fed’s QE2 policy, from the angle that it wants to revive the U.S. economy and increase employment. But the problem is the dollar is the global reserve currency…It may not be the right choice for the global economy, though it is a good option for the U.S. economy.
China is, itself, under the gun for its own currency manipulation, but this kind of challenge coming from a nation with an economy the size of China’s will bear watching in Seoul and the months ahead.
China’s jawboning is only the tip of the iceberg. Chancellor Angela Merkel’s Germany has been even more vociferous in opposition to Fed Chairman Ben Bernanke’s QE schemes.