Why Fed Bond-Buying Plan Is Raising Global Tensions
The Federal Reserve's plan to buy more Treasury bonds has incited critics at home to complain of inevitable high inflation and financial turmoil.
It turns out many foreigners are pretty angry, too. They say the Fed's $600 billion program is a scheme to give U.S. exporters an unfair edge — one that endangers the global economy.
Is it? Or is the Fed's plan a credible way to help end a desperate jobs crisis and revitalize a still-tepid economy?
In either case, few dispute that Fed Chairman Ben Bernanke is taking a gamble. Whether or not his plan succeeds in aiding the U.S. economy, it risks triggering a trade war and encouraging dangerous speculation in financial markets.
Already, the finger-pointing threatens to wreck this week's summit of world leaders in Seoul, where the Fed's plan has set off vociferous debate. President Obama on Thursday was forced to defend U.S. policies at the summit, saying "the most important thing that the United States can do for the world economy is to grow."
Many economists say the Fed didn't have much choice—not with U.S. unemployment stalled at 9.6 percent, short-term interest rates already near zero and Congress refusing to spend more to jolt the economy.
"They've run out of bullets," says Uri Dadush, director of the international economics program at the Carnegie Endowment for International Peace.
So the Fed announced plans to print enough money to buy an average of $75 billion in Treasury bonds each month for eight months. And it left the door open for more. The bond-purchase program is intended to energize the economy by forcing down long-term interest rates. Those lower rates might encourage some consumers and businesses to borrow and spend more.
Will the Fed's program do that?
Not likely, its critics say. For one thing, mortgage rates have already dipped to record lows without reviving the housing market, reducing high unemployment or stimulating much growth. Would people and businesses that can't or won't borrow now at super-low rates start borrowing if interest rates on loans dip a bit more - enough to rejuvenate the economy?
A bigger hope is that lower rates will lift stock prices. That's because, as Bernanke has suggested, investors will shift money out of low-yielding bonds and into stocks. Higher stock prices make people feel wealthier — and more willing to spend.
Business leaders are no different. They become more confident when their personal wealth rises and when their company's stock goes up.
They're more likely to hire and expand. Once they do, the economy strengthens.
Yet the Fed's move threatens to inflame global tensions. That's because of what happens when it prints more dollars to lower interest rates: More dollars flooding the financial system will cause the dollar's value to fall. U.S. products become cheaper around the world. And foreign goods become costlier in the United States. Americans then become less likely to buy foreign products.
Economies like Germany and China, which have ridden a wave of exports out of the recession, complain that the Fed's main goal is to lower the dollar's value to give U.S. exporters an unfair price advantage. They call the move hypocritical because Washington has long complained that Beijing keeps its currency, the yuan, artificially low to boost Chinese exports.
In September, the U.S. trade deficit with China amounted to $27.8 billion. That's just short of August's record high. And it exceeds the U.S. trade gap with the rest of the world combined.
Critics also warn that rates kept too low for too long could inflate new bubbles in the prices of commodities, stocks and other assets.
That's what happened before with technology stocks and home prices.
Moving Money Out of the US
Developing countries like Thailand and Indonesia fear that falling yields on Treasuries will send money flooding their way in search of higher returns. Such emerging markets could be left vulnerable to a crash if investors later decide to pull out and move their money elsewhere.