2010 November 15 Monday
QE2 Improves US Export Position?

The Quantitative Easing round 2 by the US Federal Reserve has elicited criticisms in many quarters, including abroad. At the same time, the Obama Administration has been criticized for not achieving diplomatic progress in reduce the US trade deficit. Menzie Chinn takes a more nuanced view: QE2 is doing what diplomatic negotiations failed to do.

The narrative emerging in the wake of the G-20 meetings is that, not only is the rest of the world angry at us over quantitative easing, but we also achieved none of our diplomatic objectives regarding rebalancing (the coverage seemed particularly negative on CNBC).


I think one important point is to realize that achieving economic goals and diplomatic successes are not always the same.

If a leader of one country gets praised by leaders of other countries one needs to ask why. Do not take the praise (or criticism) at face value. Could be the praise is an indication of submission and loyalty. Or it could be a way to boost the position of a leader who is acting against his own country's interests to the benefit of other nations. Leaders and countries are competing for influence, power, and profit. Their statements are calculated to further their interests.

Regardless of what foreign critics of QE2 might say publicly, QE2 is being criticized abroad because it is going to help US exporters at the expense of exporters in other countries.

I have also been thinking about the anger with which the policymakers and economists in the rest-of-the-world (as well as certain US politicians [5]) have greeted QE2 with. In some ways, the fact that they are angry speaks volumes about the effectiveness or ineffectiveness of QE2. (In other words, to criticize QE2 as having no effect, and then to be angry that it is being undertaken, are internally inconsistent views.)

My view is that anger at the US position is currently being driven by an understanding that QE2 has been surprisingly effective at depreciating the dollar, and that the rest-of-the-world has limited scope in countering that depreciation. In a game theoretic context, we usually think of competitive devaluation as a form of the prisonerís dilemma, where the devalue option dominates the no-devalue option, and both parties end up with a devalued currency, but no net improvement because countries cannot all devalue against each other.

Chinese criticisms that QE2 will cause a Chinese bubble are nonsense. The Chinese government has already caused a Chinese bubble. Reduced Chinese competitiveness in the face of a depreciated US dollar will deflate the Chinese bubble, not inflate it further.

Share |      By Randall Parker at 2010 November 15 09:51 PM  Economics Trade

A.Prole said at November 16, 2010 12:27 AM:

All it will do is increae US inflation (as classical theory tell us), and thusly undermine US investment plans.It will do nothing to increase American production.Since most consumer goods are now outsourced, all it will do is to increae the price of consumer products, whilst not increasing uS production - which simply no longer exists.
It's like trying to resuscitate a corpse.

Black Death said at November 16, 2010 6:19 AM:

Pat Buchanan has a recent column criticizing QE2 (http://www.humanevents.com/article.php?id=39962). It will certainly stoke inflation. Whether it will improve the US economic position is dubious, since other nations can play exactly the same game with their currencies. Beggar-your-neighbor isn't likely to succeed in the long run. The fact that Paul Krugman likes it should give us all pause.

not anon or anonymous said at November 16, 2010 7:08 AM:

A. Prole and Black Death, the Fed has committed to keeping inflation around 2% per year (PCE deflator) for the foreseeable future. This is higher than current measures of inflation, but it will not undermine the US economy.

Black Death said at November 16, 2010 7:16 AM:

"the Fed has committed to keeping inflation around 2% per year (PCE deflator) for the foreseeable future. This is higher than current measures of inflation, but it will not undermine the US economy."

Yep, yep, if the Fed says it, it must be true. No reason to doubt these experts, given their outstanding track record (what housing/credit bubble?). The US economy is in the worst shape in decades, maybe the worst since the 1930's. But none of this is the Fed's fault, of course. We can rely completely on what they tell us. Yep, yep, must be true.

no said at November 16, 2010 12:29 PM:

The reason other countries are not happy about it is because the dollar is the reserve currency and is held in huge quantities by foreign banks and governments, the US is devaluing their money as well as your own, ofcourse they are going to complain.
The US will soon lose the dollars status as the reserve currency.

The policy is madness, and certainly wont solve Americas enconomic problems.
Read, "How the economy was lost" by Paul Craig Roberts, I don't agree with some of his gloom but he does point out a lot of real issues that need attention.

Stephen said at November 16, 2010 2:27 PM:

I'm with no on this. Pumping money into the system just speeds the decline of the US dollar as the reserve currency.

You know what the scariest question is? What is the true level of the dollar once the world treats it as just another currency?

While a low dollar might in theory be great for a manufacturing, the fact is that the US no longer has a substantive manufacturing sector. Not that anyone will be worrying about that because the front page of the newspapers will be full of stories about imminent tax rises and cuts in basic services as the government desperately tries to cut its deficit and pay down existing debt that it now has the refinance at market rates.

In short, taxes skyrocket, interest rates skyrocket and gov outlays are dramatically cut. Imagine the carnage as all three simultaneously hit an economy that is already fragile.

Randall Parker said at November 16, 2010 6:24 PM:


Better to lose reserve currency status than to continue running a large trade deficit. Really, this is not sustainable and the sooner the trade balance correction comes the less painful the transition will be. If the US keeps going into hock to the world then the correction will be much more severe when it comes.

What's the correct level of the dollar? Probably within 20% or so of what it is now. Comparison of product prices in the US and abroad doesn't lead to the view that the USD is hugely overvalued.

Black Death,

If inflation gets back up to 2% then I'll start worrying about too expansive monetary policy.

Randall Parker said at November 16, 2010 6:26 PM:


The East Asian governments hold lots of dollar bonds in order to boost their exports. I object. This causes the US to go into debt to the rest of the world. That debt to the world is one of our biggest problems.

Stephen said at November 16, 2010 7:52 PM:

I agree that its better for the US not to have reserve status. Unfortunately the US economy is now entirely addicted to the privileges that run with being the reserve. The transition is going to be both painful and bloody.

The East Asian governments hold lots of dollar bonds in order to boost their exports. I object. This causes the US to go into debt to the rest of the world. That debt to the world is one of our biggest problems.

The blame is around the wrong way - the East Asian governments wouldn't be able to buy dollar bonds if the US didn't keep issuing them. Economy starts at home.

Demolition Man said at November 16, 2010 9:28 PM:

The trouble is that the US is losing its know-how and qualified personnel to re-industrialize and build/operate new manufacturing facilities, meaning that although a lower dollar is a necessary condition for re-industrialization, this process will be slow and difficult.

Another problem is that because the US imports 70 % of its oil (which will become 90 % by 2020), a lower dollar means a much more expensive foreign oil. But on this occasion, let me make a digression and mention that it appears that due to political reasons and various lobbies, the development of methanol fuel (instead of the subsidized but uneconomical ethanol) has been suppressed. Apparently, the cost of manufacturing methanol is far below ethanol, and methanol is an even better fuel than ethanol.
Apparently methanol can be made not only from coal and natural gas, but from various of low-grade biomass sources, for approximately $1/gallon, which is way below the price of ethanol.

California Kid said at November 16, 2010 10:59 PM:

The trouble is that the US is losing its know-how and qualified personnel to re-industrialize and build/operate new manufacturing facilities

This is an important point. The baby boom generation is not passing on their immense knowledge to younger generations as much as they should be. I have a dentist in his 50's who is highly skilled but who has no understudy. When he's gone, all his knowledge goes with him.

This is due to the baby boom not having many kids, and due to the fact that immigrants either have low IQ's or are cloistered in ethnic bantustans (by their own choice).

We're going headlong into dystopia thanks to the Left, and to the Rich, and to women's hypergamy. And to men's conceit.

Mike said at November 17, 2010 5:35 PM:

Demolition man is on to it, quantitative easing is clearly designed to stimulate American industry, which is why China and (especially) Germany are so critical, however it is certainly going to be a long and difficult process stimulating a sector which is almost near its death bed.

Personally I think oil in the U.S is far too cheap, and actually undermines American industry. People outside the U.S. are put off buying American cars, boat engines, tractors etc because they are perceived to be less fuel efficient than Asian and European products. If the U.S had to pay more for oil it would produce more fuel efficient products which were more in tune with what other countries wanted.

Demolition Man said at November 17, 2010 6:48 PM:

Actually Quantitative Easing is only helpful for debasing the dollar, but it does not help lending to small businesses. The banks are sitting on a pile of cash but they are not lending to small businesses. The Fed or the Government should directly and massively lend to small businesses.

In addition, note that debasing the dollar is not enough to re-industrialize the US, because the know-how is being lost and it is not being replenished. The government should help dynamic vocational schools for industry (the way Germany does), and new laws should reward re-industrialization: total tax exemption for new industrial companies and their blue collar workers; new depreciation laws to write off new machinery if it is made in the US. Cheap health care for young workers can be arranged by the government, since young and middle aged blue collar workers rarely get expensive terminal diseases like cancer, their health care is really cheap. Also the government can build cheap apartment complexes directly for blue collar workers, no questions asked, part of the salary and contract for working full time at least 10 years would be the government contribution of a free apartment, as part of the compensation for accepting a low salary. Instead of socialism, this is a family capitalism, like in Sweden or Germany. Germany is the most capitalistic country in the world, but it does everything possible to keep manufacturing industries at home.

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