The battleships of the world economy are temporarily floating on a flood of new money.
Not everyone is happy – especially the smaller craft that are having a hard time maneuvering in these heavy seas.
As Lewis Lehrman wrote in The Weekly Standard in February 2011, “the enormous Fed credit creation of 2008-2010 could not be fully absorbed by a U.S. economy in recession. But much of this new Fed credit has flooded stocks, bonds, and commodities. The excess credit went abroad, too, causing a fall in the dollar and creating bull markets and booming economies in the developing world. At the same time, inflation intensified, with riots and political turmoil as a result.”
Now, the Wall Street Journal’s Alex Frangos has argued: “When the Fed launched an earlier bond-buying program in 2010, many...emerging markets were preoccupied with controlling inflation and felt threatened by Fed efforts to spur growth. With these emerging markets now suffering their own growth ills, fed stimulus has the potential to help, not hurt.” Frangos added: “That isn’t stopping complaints that the Fed’s actions will flood the world with too much capital.”
Emerging-market leaders lament that all the new money created by the Fed debases the dollar’s value and makes their economies less competitive. They also say it puts upward pressure on food and energy commodities. And they say all that new cash can build into an uncontrollable and financially destabilizing wave of money as it seeks higher returns in relatively stronger economies in Asia and Latin America.”
“The Fed’s recent move has already stimulated complaints fromo some of the usual suspects,” noted Alan Beattie and Alice Ross in the Financial Times. “Guido Mantega, the Brazilian finance minister who was the first prominent policy maker to use the expression ‘currency war’ in 2010, has again raised the spectre of competitive devaluations. Tension around exchange rates has yet to reach the heights of two years ago but some developed economies, particularly those seen as havens, are being drawn into the fray.
They noted that “if emerging markets are dragged in en masse, they could be even more resistant than in 2010 to pressure from developed economies to allow exchange rate appreciation and greater trade deficits.”
“Throughout the euro crisis,” noted the Economist’s Free Exchange columnist, “policymakers have been desperate to buy time so that the therapies prescribed for troubled European economies can be administered. The European Central Bank’s new bond-purchasing strategy has ushered in another period of respite, which with luck will last longer than previous ones.”
So, the big ships are buying time in this battle, but the little boats are not prepared to be swamped by their wake. Perhaps the emerging markets may emerge as leaders in the fight for a more sane monetary regime.