is F.R.B. just stimulating FOREIGN economies?

Great Debates
1

The Federal Reserve Board just announced that it will inject yet another $600,000,000,000.00 into the world economy (by buying T-bonds or T-bills). I guess such stimulus requires no Presidential or Congressional approval so goes almost unnoticed. Still, $600,000,000,000.00 is a lot of money and it would be nice to feel we’re getting something for it besides just Treasury paper (deemed worthless phony paper in a nearby thread :smiley: ).

On a recent trip to Bangkok I picked up one of the local English dailies and read an opinion in their financial section. I’d be interested in hearing Dopers’ response. Recall that the Thai baht was “dramatically overvalued” in 1997, mainly due to an influx of money from eager foreign investors; the Great Asian Financial Crisis ensued; over several months the Thai baht then lost 50% of its value.

The Thai baht has gradually risen over recent years (and zoomed in recent weeks) and is now approaching the value it had before the crisis of 1997! (Thai financial commentators are better informed now and are complaining that the Baht is too high – then they were complaining it was too low! :smack: ) Anyway, the Thai newspaper identified a reason for this (undesireable) influx of foreign capital, and their explanation seemed plausible.

The F.R.B. hands $600 billion in “new” money to investors, in effect telling them to invest in anything except U.S. Treasuries. Presumably, the idea is that they’ll invest in the U.S. economy. … But why should investers invest in a moribund economy about to do the second dip of a double- or triple-dip recession? Especially when they can instead participate in booming Asian economies?

So F.R.B. prints another $600 billion, still hoping to stimulate U.S. When that also goes to Asia, will we print another $600 billion? (If I were a U.S. economics advisor I might suggest a way to provide stimulus with strings attached, but I suppose that would make me a “Stalinist central planner who hates successful people.” :smack:)

2

Since exchange rates float this influx of new dollars will cause other currencies to gain value against the dollar. Foreign investments denominated in dollars will then become more expensive rendering no better value than before the Fed’s action. What this Fed’s actions are about is using the money illusion to fool people into investing, producing, and spending.

3

Exchange rate equilibrium holds in the rational long-term. In the irrational short-term, money will flee the U.S. to rising currencies, whether their rise is “rational” or not.

Your comment might imply that U.S. woes are due in part to a Dollar that, despite recent weakness, is still overvalued. Is this a widely held opinion? Perhaps so, but I hadn’t heard.

In my opinion, government stimulus would be better addressed at America’s huge need for repairing roads, levees, etc. rather than, in effect, just printing banknotes, handing them to international financiers, and saying “Do whatever you will!”

Obama and the Democrats couldn’t get this right. (If they had, would the recent elections have turned out better? I don’t know.) Surely I’m not the only one that sees U.S. misdirection as a profound historic tragedy.

4

If my comment seems confused – how could our Central Bank have repaired infrastructure? – perhaps that’s the point:

IF Obama and the Democrats had done their job appropriately, and translated the lapse in consumer demand into useful public investment, instead of their too-small stimulus focused on politically expedient pots of cash;
THEN the FRB would not have had to resort to the only stimulus legal without Congressional approval: creating fiat money and handing it (if indirectly) to the same Wall Street figures that brought us to crisis in the first place!

5

Since the money multiplier is still less than 1 (i.e., 1 new dollar creates less than another new dollar over the course of a year - normal range is 2-3), any additional cash pumped into the economy will have no appreciable effect. There is already over a $1 trillion in excess reserves held by banks with the fed and it has been that way for well over year. Yet that excess liquidity has done nothing to stimulate either the economy or inflation.

Therefore, I believe that this move by the fed is simply for the purpose of massaging the “optics” of the situation. It creates the appearance that there are too many dollars floating around. This stimulates inflationary expectations which in turn encourages people to spend their dollars now while they’re still worth something. That in turn stimulates the economy. It also drives down the value of the dollar making US exports more competitive and imports relatively more expensive - another factor that encourages present consumption.

As a side note, the focus of the fed’s purchases (they put new money into the economy by buying securities) are 2-10 year treasuries. That will help to keep short to intermediate rates low while allowing the long end of the yield curve to climb.

6

Translation: “If Mitch McConnell and the other 39-40 senate Republicans hadn’t done everything possible to make sure things stayed as fucked up as possible…”

But, hey, go ahead and blame the black guy in the white house and the stinky hippies that did everything they could to fix it, since that fits your zeroth order world model.

7

An article on salon.com says other countries are none too happy with the move: The Fed’s magic money machine annoys the world.

8

I suppose this is obvious, but an artificially weak currency amounts to a tariff. If $1 only buys 50 yen instead of 100, it’s the same as imposing a 50% (or 100% depending on which way you look at it) tariff on everything Japan wants to sell us.

9

That’s just whining. To peg your currency and then complain that you’ve lost control of your monetary policy is just asinine.

10

While I’ve certainly heard the term before, it just now occurs to me that I don’t really know what “peg your currency” means.

Who’re the whiners here – I assume you mean the Chinese (if not others)? And more importantly for my understanding, why?

11

A peg means fixing the value of your currency to something else, instead of letting the value float freely from moment to moment according to the international currency exchange market.

Historically, the most common peg was to gold. A gold standard is simply a gold peg, where each dollar (or other currency) is worth an exact weight of the precious metal. The monetary authority fixes the value of the paper by being willing, always, to buy or sell that paper for the stated amount of the metal. Today, a more popular choice for a peg is the US dollar, although it is also possible to peg to a basket of currencies. Of course, there is always going to be some pressure on any peg, which can build to enough stress to undermine the peg, which is why the international gold standard failed.

If the RMB were allowed to float freely, its value would appreciate compared to the dollar. But China keeps its currency pegged to the dollar (longer explanation), its value artificially undervalued. But this means that China needs to buy up dollar reserves to maintain the peg. The Fed’s actions are making their own currency manipulations much more difficult, which is why they’re complaining. But it is ridiculously hypocritical of them to complain about US currency mechanics when they’re been manipulating their own currency for so long.

12

That was my (somewhat vague, now improved) understanding of the situation, although I have to admit that it wouldn’t have occurred to me to equate the terminology “gold standard” with “pegging to gold”. Thanks, Hellestal.

13

Yes.

The US cuts rates on 5 year treasury notes. Investors flock to (say) Malaysia and Japan: the dollar declines relative to those currencies. Now US exports are cheaper abroad, while Japanese imports to the US are more expensive here. Either way, a decline in the dollar helps US manufacturing.

Now making imports more expensive can also add to US inflation. But that’s not a problem now: inflation is declining and the US faces a risk of declining prices and a weakening economy. Furthermore, if inflation were at, say, 5% then inflation adjusted interest rates would be very negative: this should stimulate investment.

So far I’ve discussed the direction of these effects, but not the magnitude. The size is actually pretty small, supposedly equivalent to something like a 3/4 of one percent cut in the fed funds rate. I was actually pretty happy that foreigners were in a tizzy about this, because it indicated that somebody thought that these policies might actually have a nontrivial effect. Anyway, if foreigners fear that their economy will soften too much, they can cut their own rates. And if they fear domestic inflation, then a weaker dollar should help them.

ETA: In summary, no the FRB is stimulating the US economy. In the absence of countervailing moves by foreign governments or foreign central banks, it is depressing activity abroad. If foreign central banks respond by loosening on their own, then world demand should increase, to some extent. (This effect may be small insofar that we are in a liquidity trap.)

14

Just to get on record: The QE is good.

It’s likely to be insufficient.

It would be far better if the Fed set an explicit nominal target, either a long term price level path, or better, a long term national income path. After setting this target, they should announce to the world that they will, without question, hit their target. They will do whatever it takes. Instead, though, they just announced a dollar amount of easing with a brief statement that they think inflation is too low. That’s not nearly as good. It’s too ambiguous, since they can hoover all that cash right back out of the system if they have a mind. A target would be more trustworthy, as something that the markets can understand. Bernanke knows all this, too. It’s frustrating watching them fumble, but I can imagine he’s stressed juggling the concerns of the FOMC.

Well, not exactly. There is another important effect at play here.

The Fed’s move to ease money does, yes, make things more favorable for US exports and puts a premium on imports. You can say this is like a tariff. But monetary easing in the US also increases US demand, and thereby world demand, in a time of deflationary pressure. And more US demand means more demand for goods from all over the world, even given higher prices for those goods. This is to say that the net effect can be ambiguous. Thankfully, there are people in the Chinese government who seem to understand. Consider this, from their finance vice-minister Wang Jun:

That is exactly right. It’s gratifying to know that at least some Chinese officials are more on the ball than the Germans. Their finance minister Schaeuble probably isn’t an idiot, but he’s still doing his best impersonation of an idiot. He’s bitching about the US, as if the EU is powerless to do anything. But the Europeans have their own currency. The Japanese, too, have domestic tools at their disposal here. Money is too tight in Europe and Japan, just as it’s been in the US, and there is absolutely nothing preventing them from following suit toot sweet. They have options, as they should realize if they weren’t so busy bitching.

The Chinese, at least some of them, realize what’s going on. Of course, given their understanding of this point, they should also be aware of the unfriendliness of their own policies. The Chinese peg creates inflationary pressure in China, which they attempt to fight by raising domestic interest rates. They can get away with this because of their strict capital controls. While the US QE should increase world demand, higher domestic rates in China serve to decrease world demand. That is a huge difference, and that’s the core reason why they’re in no position to complain about US currency actions.