In the week before the summit in South Korea, the Federal Reserve unveiled its “quantitative easing” plan, more commonly known as “QE2.” QE2 involves the Fed stimulating the U.S. economy by increasing the money supply. It is doing that by buying $600 billion of U.S. government debt.
It doesn’t take a Nostradamus to figure out that another $600 billion in circulation will decrease the value of the greenback in global markets. So it wasn’t hard for the Chinese in Seoul to tar the Obama administration, deflecting attention from their predatory currency policies. Forget that there would be no need for QE2 if the Chinese had not rigged the value of the renminbi in the first place. The U.S. got blamed in Seoul — and China largely did not. Obama handed the Chinese a weapon, and they turned around and drove it right through him.
President Obama tried to deflect criticism by saying that the Fed acts independently of the White House. That’s the theory, but the reality is that one phone call — “Mr. Bernanke, please hold off QE2 for a little while so that I can defend the world’s system of international commerce from Beijing’s predatory trade policies” — would have avoided the second debacle in Seoul.
And what a debacle it is. Now, the global currency war that had started in the months before the G-20 will surely injure all economies. In recent weeks, 18 nations — 19 if you include the U.S. — were depressing the values of their currencies. If you’re looking for a historical parallel, think about the tariff war of the 1930s that deepened the Great Depression.
And we all know what happened after that.