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BOSTON — There was a time when parsing monetary policy was for nerds.
Last week's move by the Federal Reserve to pump $600 billion dollars into the U.S. economy has provoked worry (and anger) from Berlin to Brasilia and beyond — just as U.S. President Barack Obama and other world leaders meet in Seoul for the G20 summit.
In brief remarks ahead of their meeting Thursday in Seoul, Obama and China's President Hu Jintao made no mention of the currency dispute between the two countries, or of the controversial QE2 decision.
Questions remain. Will the "Night of the Living Fed's" quantitative easing provoke a global currency war? Will it lead to the collapse of the dollar? Will it strangle Chinese and German exports? Or will it work to shore up the U.S. economy, still the world's largest and most important economic force?
We asked GlobalPost correspondents on four continents to see how "QE2" is resonating around the world. As they found out, it's not a pretty picture.
Here's a quick round-up:
|A Chinese worker shows a 1000 gram gold bar at a gold shop in Beijing on Nov. 8, 2010. (AFP/Getty Images)|
China: Beijing, which has the most to lose from the QE2 decision, has not been subtle in its condemnation, scolding the United States, in part through official media and economists.
Zhou Xiaochuan, the governor of China's central bank, last week said the Fed's plan was "not necessarily optimal policy for the world," though he did also suggest that it was a "reasonable" move for U.S. policymakers faced with high unemployment and slow economic growth.
A Chinese credit ratings agency, meanwhile, downgraded the U.S.’s ranking as an investment, saying the QE2 move was “like drinking poison.”
The real impact on China is somewhat uncertain at this point, but it could be big. Some respected global economists already are saying it was the wrong move and could create negative consequences and a true currency war between the two countries.
The world’s manufacturing leader with an ever-growing trade surplus ($27 billion, according to the October figures), China is also the leading investor in U.S. dollars holdings.
South Korea: South Korea was the first to come out swinging against the QE2 move, saying it will work to aggressively curb capital inflows.
But today, at a joint news conference with U.S. President Barack Obama, South Korea’s president downplayed the potential impact, saying he didn’t believe the decision would cause major problems for his country.
By Kathleen E. McLaughlin in Beijing
|A bank teller counts 10,000 yen ($118) bank notes in Tokyo on Sept. 22, 2010. (Yoshikazu Tsuno/AFP/Getty Images)|
Japan: While QE2 has stoked fears of bubbles in cash-flooded emerging Asian economies, Japan — which arguably wrote the book on quantitative easing — is reserving judgment for now. The finance minister, Yoshihiko Noda, said he would keep a “close eye” on the Fed’s latest round of monetary easing.
There is concern, however, that the U.S. move could push the dollar down against the yen, just as the Japanese currency’s surge in appears to be losing momentum. “I believe that we have to keep a close watch on developments concerning economic conditions in the U.S. and monetary policy,” Noda said soon after the Fed’s announcement. “We will maintain our stance of monitoring the foreign exchange markets and will take decisive steps if necessary.”
Few will be watching the impact QE2 has on Japan more closely than the country’s central bank. Days after the move, the Bank of Japan opted to maintain interest rates at between zero and 0.1 percent, but indicated it could expand a program to buy 5 trillion yen’s worth of assets by the end of 2011 to stimulate the economy. Analysts believe that, for now, any policy initiatives by the BoJ will pale in comparison to QE2, given that a return to more robust quantitative easing would heighten concerns about creating asset bubbles in the region’s developing economies. That said, failure to respond to another surge in the yen, which has gained 15 percent on the dollar so far this year, would likely add to domestic pressure to further loosen credit. Doing so is seen as one way of countering deflationary pressure and aiding Japanese exporters, whose overseas earnings have been slashed by the yen’s climb. But don’t expect the BoJ to move until the beginning of next year at the earliest.
By Justin McCurry in Tokyo
India: Unlike most economies in Asia, India's growth is based on internal demand, rather than exports. So despite fears of hot money flooding into India and driving up the value of the rupee, Indian officials have so far been sanguine about the Fed's QE2 package. In one of the first public reactions from a top world leader, Prime Minister Manmohan Singh told reporters gathered for a joint press conference with Obama that anything that would “stimulate the underlying growth of entrepreneurship” in the U.S. “would help the cause of global prosperity,” implicitly backing the move despite questions whether India would be caught in the middle if the infusion were to touch off a currency battle between the U.S. and China. Similarly, though finance ministry officials recognized that a costlier rupee — which hit a two-year high against the dollar following the Fed's announcement — would hurt Indian exporters, top economists such as the Planning Commission's Montek Singh Ahluwalia and chief economic adviser to the PM Kaushik Basu recommended against new capital controls to limit the inflow of funds.
|U.S. President Barack Obama with India Prime Minister Manmohan Singh at Hyderabad House in New Delhi, Nov. 8, 2010. (Jim Watson/AFP/Getty Images)|
It's not just the nature of India's internal demand led economy, but its rocketing strength, that's allowed Singh to back the Fed. Over the past two-and-a-half months, foreign institutional investors pumped some $16 billion into India to take advantage of higher interest rates and a bullish stock market, helping to send the bellwether Sensex close to its all time high of 21206.77 — reached on Jan. 8, 2008 — and some market watchers predict the index will test 23,000 before the year ends.
However, with India's fiscal policy makers already concerned about inflation's drastic effects on the poor, a new burst of hot money would likely prompt an intervention from the Reserve Bank of India (RBI), said Shubhata Rao, chief economist at Yes Bank. "My sense is that the government and RBI will be on vigil because between now and the January quarter, some profit booking will cut capital flows, but after that we'll see renewed intensity of cap flows coming into the country," Rao said. "At that stage, capital controls might be needed if capital flows continue to put pressure on the rupee."
So far, though the nominal value of the rupee has appreciated considerably, Indian exports remain competitive because the currency of rival nations have also climbed versus the dollar, Rao adds. But if the rupee appreciates from today's 44 to about 40, she says, the RBI would be forced to intervene to support exporters of traditional handicrafts — still a major employer in India. "There are certain reservations that are shared throughout the globe that [the cash infusion] may trigger off inflationary tendencies in countries where the capital is driven to," said Saumitra Chaudhuri, a long-time member of Singh's Economic Advisory Council. "This is uncharted territory. No one has done this before on this scale."
By Jason Overdorf in New Delhi
German Finance Minister Wolfgang Schauble.
(Dominique Faget/AFP/Getty Images)
Germany: Germany’s Finance Minister Wolfgang Schauble is angry enough for the whole of Europe. Among other things he has said the Fed’s monetary policy was “horrendous” and that the U.S. had “lost its way.” In short, Schauble and colleagues accuse the U.S. of hypocritically manipulating its currency China-style, which will hurt Europe by making the old continent’s exports more expensive. Timothy Geithner’s perceived attacks on Germany’s massive trade surplus haven’t helped. The headline this week in news magazine Der Spiegel summed up the mood: “U.S. to bully Germany on trade surplus at the G20.”
Germany’s economy, including the current boom, is heavily dependent on exports of its high-tech manufactured goods and Germany’s apoplexy over QE2 is calibrated accordingly. The U.S. is Germany’s largest export destination outside of Europe. Not everyone is as livid as Schauble. Some commentators have pointed out that big German firms learned how to deal with a strong currency back when they had the mighty Deutschmark. They have learned to stay competitive in a global market by keeping wages and costs down.
France: The other European giant, France, has been more restrained. Rather than blasting the Fed, French Finance Minister Christine Lagarde has followed the lead of President Nicolas Sarkozy in using the QE2 controversy to highlight the need for greater monetary cooperation to stabilize exchange rates. This is something France plans to pursue when it takes over the G20 presidency Friday. While lamenting that the euro would “bear the brunt” of the QE2, she carefully added that she was “not making a judgment on the U.S. quantitative easing.”
France is less reliant on exports, though its economy is also weaker overall, so it can ill-afford a soaring euro. As analysts at Citigroup recently pointed out, a euro worth $1.50 (it is now $1.37) would hurt big defense and technology exporters such as aerospace firm EADS — the maker of Airbus — which earns 75 percent of its revenue in U.S. dollars.
By David Wroe in Berlin
Southeast Asia: A weakened dollar is roundly feared among Southeast Asia’s emerging economies, which will likely see their currencies grow comparatively more expensive. That’s bad news for a region reliant on exporting goods at competitive prices. Thailand is already panicking over the appreciation of its currency, the baht, which has shot up 12 percent this year against the dollar. Vietnam has devalued its rising currency, the dong, three times this year. Still, Thai Finance Minister Korn Chatikavanij insists Thailand and its neighbors need to start adjusting to their stronger local currencies. As Southeast Asia finds itself increasingly squeezed by decisions in Beijing and Washington, the region should also play a stronger mediation role, he said. “We would like the two economic giants to settle their differences on the exchange rate issue,” Korn told Bangkok’s The Nation newspaper. “I think they understand our predicament.”
A farmer works with a buffalo on a rice field in the northern province of Son La, Vietnam, on July 25, 2010.
(Hoang Dinh Nam/AFP/Getty Images)
The most immediate danger to Southeast Asia is a sudden flood of short-term capital investments from foreign powers, skittish of the weak dollar and seeking better gains in the developing world. Too much investment too soon could rattle these less-mature economies, sending stock, assets and real estate prices soaring and inviting the threat of inflation. Every Southeast Asian currency has strengthened this year and stock markets in Malaysia, Indonesia and the Philippines have hit record highs. What can be done to keep currencies low? The two largest Southeast Asian economies, Indonesia and Thailand, are both openly warning of higher taxes to ward off the influx of foreign investment.
By Patrick Winn in Bangkok
Russia: The Fed’s announcement has failed to solicit wide comment from top officials. President Dmitry Medvedev’s economic adviser, Arkady Dvorkovich, criticized the U.S. for failing to consult with its partners in the G20 ahead of the move, but quickly moved on to praise QE2’s potential effects on Russia. “Capital inflow for Russia now is a plus,” he said. “It may not be a plus for other emerging countries such as Brazil or China where economies are overheated. Our economy is not overheated.”
A man walks in front of the Novokuibyshevsk refinery near the city of Samara, Oct. 28, 2010.
While the ruble had bounced back from its managed 30 percent devaluation in the wake of the crisis, its value has slid in recent months because of concerns about Russia's economic recovery and current account balance, as well as political risks. So while most emerging economies worry about QE2’s effects on their rising currencies, Russia can largely sit back and relax.
What’s more, a weaker dollar tends to lead to higher commodities prices and Russia’s economy relies mainly on exports of oil, gas and metals. And a stronger ruble would decrease the debt burden on banks and oligarchs with foreign creditors, as well as potentially help combat inflation, which has long been a major preoccupation in Russia.
Russia is also relatively safe when it comes to foreign reserves. It holds the world’s third largest, with the total value of its foreign exchange and gold holdings coming in at nearly $500 billion. Of the forex portion, 47 percent is held in dollars — the rest in euros and pound sterling.
By Miriam Elder in Moscow
South America: Brazil has been by far the most vocal critic of the Fed’s plan in all of South America. Finance Minister Guido Mantega raised the specter of a worldwide currency war even before the bond buying was announced. And since then, current President Luiz Inacio Lula da Silva and President-Elect Dilma Rousseff have both criticized the Fed's move, focusing on its likely devaluation of the dollar. Rousseff went so far as to say that the last time world nations took competitive steps to devalue their currency “it ended in World War II.”
|Brazil's President Luiz Inacio Lula da Silva shows his hands, dirty with the first extraction of pre-salt oil, at the Petrobras platform, Oct. 28, 2010. (Antonio Scorza/AFP/Getty)|
The rhetoric has been muted in Argentina and Chile, where the plan has barely made headlines. Argentina’s finance minister, in Seoul for the meeting of the G20, spoke obliquely of the need to moderate capital inflows and pour more capital into production, as opposed to “speculation.”
Brazil may well have the most to lose. Goldman Sachs ranked Brazil’s real as one of the world’s most overvalued currencies last year, and — despite measures to curb capital inflows — it has continued its surge against the dollar. The U.S.’s quantitative easing is likely to keep pushing investors toward Brazil, which officials worry could create a bubble. The Chilean government is also worried about its currency: the Chilean peso has gained more than 10 percent against the dollar in recent months. Argentina, by contrast, seems relatively less vulnerable. Their currency fell this year helping create an export boom, mainly of agricultural commodities like soybeans.
By Solana Pyne in Rio
South Africa: Finance Minister Pravin Gordhan reacted angrily to the U.S. "unilateral" move, warning of “devastating consequences” to the developing world, which he said will "bear the brunt of the U.S. decision to open its flood gates.”
|A shopkeeper receives payment for a bag of maize meal at his shop in Soweto south west of Johannesburg, March 23, 2008. (Siphiwe Sibeko/Reuters)|
South Africa’s currency has been steadily strengthening, and the latest round of qualitative easing by the United States may push it up further. The rand has gained 39 percent against the dollar since 2009, and it was boosted again by speculation that QE2 would fuel the inflow of foreign funds. Gordhan said that if the South African rand continues to strengthen, lifted by increased capital inflows as a result of QE2, there could be substantial job losses — a key concern for a country with a 25 percent unemployment rate.
South Africa is the biggest economy in Africa, but the strong rand is making its products more costly, hurting its export competitiveness. The high price of minerals, especially gold which surged this week to a record high, have also lifted the rand.
The challenge for South Africa is to reduce foreign inflows from speculators seeking higher-yielding assets, without discouraging future foreign capital, much needed for growth in South Africa, a country with a low level of domestic savings and high unemployment and poverty. So far South Africa has responded by increasing foreign reserves and lowering interest rates, but this hasn’t had much effect. If the G20 meeting fails to deliver a global solution, South Africa may look at domestic options including taxes on short-term capital inflows.
By Erin Conway-Smith in Johannesburg
Editor's note: This story was updated to add the day's news from the G20 summit in Seoul.
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