The Fed's $600 billion quantitative easing program "introduces significant uncertainty regarding the future strength of the dollar and could result both in hard-to-control, long-term inflation and potentially generate artificial asset bubbles that could cause further economic disruptions," the Republican leaders of the House of Representatives and Senate wrote.
If this new round of monetary policy does lead to a weaker dollar – then it would tend to increase net exports. Given the twin facts that we have a current account deficit and insufficient aggregate demand – this would be a good thing.
Gavin Jones and Mark Felsenthal report on the FED’s chairman reply to the critics of QE2.
No. they are not arguing for anything.
ReplyDeleteThey just want Obama to fail.
If the country goes down in flames, that is just collateral damage.
We're screwed.
JzB
QE2 should have no impact on net exports for the United States, since the dollar is the world reserve currency. While international prices rise (which, under normal circumstances should lead to a weakening of domestic demand for foreign produced goods) these international prices are overwhelmingly denominated in the domestic currency -- i.e., dollars.
ReplyDeleteThis means (at least in theory) even as foreign produced goods becomes more expensive, so do the prices of domestically produced goods, resulting in no net change in the export competitivemness of domestic producers.
This is quite unlike the position of the normal nation where its currency is not a world reserve currency. In the latter case, the inflation of domestic prices has no effect on international prices. Thus, the inflation of domestic prices is offset by a devaluation of its exchange rate with other currencies. Its domestically produced goods, therefore, become cheaper for foreign importers, increasing demand for its products.
We can conclude from this that QE2, whatever its purpose, is not to increase American exports, despite arguments to the contrary. QE2 will increase both domestic and international prices for all goods simultaneously. Or, what is the same thing, reduce consumption is all nations together.
Please correct your mistake.
To put it simply, both US and Chinese goods are priced in dollars. QE2 should have no more effect on the trade balance between the US and China than it has on the trade balance between California and Georgia. Since, all goods are priced in the same currency, all prices move together.
ReplyDeleteIncreasing net exports by weakening the dollar simply moves more widgets at the expense of the export workers. The money you save as a factory owner comes straight out of the hides of your workers as their salaries and wages are destroyed.
ReplyDeleteHere's an idea of how to increase exports: cut prices! But the companies don't do that, because their labor costs are the same and they would go bankrupt. Instead, the companies get the government to do a back-door wage cut.
A weakening currency to encourage exports is a fraud if it's somehow supposed to help workers.
>>>>QE2 will increase both domestic and international prices for all goods simultaneously.
ReplyDelete--- it depends on the competitive power of labor to bid up its price in the face of the wage cut that QE2 will impose on them.
In the gap between the currency devaluation and the eventual wage rise, the company makes more money. In some cases the prices won't rise, because the workers are just forced to accept a cut in their standard of living for the sake of a weaker currency.