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QE2 could have worked had Bernanke bought foreign currencies instead of Treasury bonds
Howard Richman, 8/25/2011

University of Maryland business economist Peter Morici, former Chief Economist at the U.S. International Trade Commission, has an excellent understanding of the way economics works in the real world, but he made a rare mistake in a recent commentary (Fixing Markets Needs to Start in White House). He missed the fact that the Federal Reserve, not just the Treasury Department, can engage in foreign exchange purchases. He wrote:

The third instrument of macroeconomic policy is exchange rates, the values the dollar trades at against other currencies. A cheaper dollar would boost exports; reduce imports in favor of domestic products; and increase demand, growth and jobs creation. Europe and North American countries have forsaken exchange rates as a policy tool and growth strategy, but not so China, Japan, India, and others, who use exchange rates aggressively to their benefit and the peril of western economies.

Asian superpowers intervene in currency markets -- they regulate transactions and sell their currencies for U.S. dollars to keep their currencies cheap, boost their exports and growth, and deprive U.S. and EU businesses and workers of customers and jobs.

With monetary policy and fiscal policy spent, exchange rates are the only tool the United States has left, and that is the province of Treasury Secretary Timothy Geithner and the President.

The Federal Reserve has had the authority since 1962 to buy foreign currencies under its own account without being subject to any control by the U.S. Treasury Department. Indeed, the Federal Reserve made use of this policy option during the 2008 financial collapse when it engaged in currency swaps with foreign central banks.

Economic history will hold Greenspan and Bernanke accountable for their failures to buy foreign currencies whenever foreign central banks were building up their dollar hoards. As a result, the U.S. has lost market share in one industry after another since 1996, resulting in the loss of about six million productive manufacturing jobs.

Unlike QE2, which caused U.S. inflation to rise from 1% to 3.5%, currency interventions are sustainable. Not only that, but when a country's currency is artificially high, as the dollar is today, they can be quite profitable. The Federal Reserve could make considerable money for the U.S. government by buying Chinese yuan now, and then selling them later, after the dollar falls 40% against the yuan. QE2 could have worked had Bernanke bought foreign currencies instead of Treasury bonds.

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Comment by M, 8/27/2011:

What are the chances that the U.S. will prevent the repatriation of U.S. dollars from overseas?

Can the monetary problems of Iceland, and the government’s response to those problems be seen as a possible model for the U.S.?  




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