QE3: What Mega-Parasite Will the US Unleash?

♠ Posted by Emmanuel in , at 8/11/2011 12:01:00 AM
  • [The US dollar is] our currency, but your problem
  • My basic approach is that foreigners are out to screw us. Our job is to screw them first
Both: John Connally, Treasury Secretary under Richard Nixon from 1971 to 1972
  • They are living beyond their means and shifting a part of the weight of their problems to the world economy...[t]hey are living like parasites off the global economy and their monopoly of the dollar
Russian Prime Minister Vladimir Putin, 1 August 2011

Ho hum, another 500+ point fall for the Dow Jones (De)Industrial(ized) Average. As if we haven't gotten used to daily batterings of the US economy by now. You don't have to be a financial genius to figure out what the United States' default response is when times turn sour. QE1, QE2...what's next in the sequence? As you can read above, however, it was not always the case that being the US treasury secretary involved lying incessantly about "strong dollar" policy, China's dollar holdings being "safe," America being a "triple-AAA country" and other side splitters. There are good reasons why the US has become a global laughingstock. It's not that Americans didn't do funny stuff back in the day (of say, Richard Nixon) but that they were more haughty in being able to be forthright about screwing others over.

But times have changed in some important respects--except the screwing foreigners over part. About half of the US debt is held by overseas creditors--many of which are unfriendly to America (think China and Russia) or annoyed with constant lectures on freedom 'n' growth despite both being in short supply Stateside (add Mideast nations). Still, US authorities believe that flat-out lies about mutual benefit, win-win and the rest can assuage those being abused.

In essence, Putin's characterization of American parasitism--dead accurate, IMHO--is nothing other than exorbitant privilege restated. Part of the puzzle has already been pieced together with the Federal Reserve stating:
The Committee currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.

The Committee also will maintain its existing policy of reinvesting principal payments from its securities holdings. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.
So, both near-ZIRP and maintenance of massive central bank Treasury holdings are on the cards. However, with the stock market having fallen 500+ points despite all this support being promised, it's probably just a matter of time before Bernanke's helicopter unloads more dollar detritus on a much-suspecting world. And, in the process, tacitly redeclaring international currency war. The US has never been particularly concerned about the effects of its policies on the rest of the world, from incubating conditions for the Latin American debt crisis in a bid to combat domestic inflation to commodity price inflation worldwide arising from its current free money policies.

With CPI inflation running at 3.6%, though, its room for manoeuvre in the "price stability" department ought to be limited. Still, there are now real debates about whether the risks of creating some inflation in Bernanke's own words are outweighed by those of prolonged, sustained, and terminal American decline.

Fortunately for us, Ken Rogoff has some sensible last-ditch suggestions which actually make sense to pull America out of its death spiral such as meaningful tax reform and rationalizing the housing-industrial complex via writedowns and suchlike. Since those are probably not forthcoming for a variety of reasons--Republican intransigence towards any sort of revenue collection and the entrenched political economy of the American Dream of homeownership--what's really left may be creating some inflation:
If direct approaches to debt reduction are ruled out by political obstacles, there is still the option of trying to achieve some modest deleveraging through moderate inflation of, say, 4 to 6 per cent for several years. Any inflation above 2 per cent may seem anathema to those who still remember the anti-inflation wars of the 1970s and 1980s, but a once-in-75-year crisis calls for outside-the-box measures. Ideally, both the ECB and the Fed would engage in expansionary policy, as otherwise there could be profound exchange rate consequences. Of course, simply trying to stabilise exchange rates without overall monetary expansion – as the G7 seems to have proposed – is far less helpful.
Having beat down inflation during the Reagan years at great political cost, it looks like American monetary authorities will now try the opposite tack given that fiscal levers are increasingly suspect (thanks, Standard and Poor's). Batten down inflation and hurt others with increasingly unserviceable dollar-denominated loans during the Latin American debt crisis. Hit the gas pedal to create some inflation to erode the value of US debts and force American consumers to spend whatever negligible savings they have left before they're useless, nevermind rising food costs causing harm throughout the developing world.

Our currency, your problem indeed. Watch the skies, ladies and gentlemen. It looks like the Yanks will again be circling above very, very soon. Odds are that It That Cannot Be Named will be falling this time. In which case Niall Ferguson trumps Paul Krugman.

UPDATE: Here is a video clip of Putin now famously calling the US a parasite on the world economy.