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Estadao, Brazil

Dangerous Dollars: America's 'QEII'


"The decision by the Federal Reserve to release another $600 billion into circulation by the middle of next year could be a very expensive proposition for Brazil. … The U.S. exports its crisis to the rest of the world, rather than contributing to the overall global recovery."




Translated By Brandi Miller


November 5, 2010


Brazil - Estadao - Original Article (Portuguese)

FED Chairman Ben Bernanke: His decision to approve QEII - not the ship but the second massive money printing operation under his watch, has markets on edge.


FINANCIAL TIMES VIDEO: FED's qualitative easing raises a question: Is it time to return to the Gold Standard?, Nov. 8, 00:03:53RealVideo

The decision by the Federal Reserve (FED, the U.S. central bank) to release another $600 billion into circulation by the middle of next year could be a very expensive proposition for Brazil. The plan is to issue approximately $75 billion per month in one more push to revive the U.S. economy, the activity of which remains at a low ebb and with unemployment above 9 percent. In exchange for this money, the FED will buy federal bonds held by the public. Dollars will continue flooding the markets and force a revaluation of Brazil's real and other currencies. Brazilian manufacturers will have greater difficulty not only with exports, but also with competing on the domestic market, because their currency is already one of the most overvalued in the world. The Chinese will continue to take advantage of a majority of their competitors because they'll find a way to keep the yuan undervalued, but perhaps a little less than before just to show some good will.


The goal of the FED, according to the official explanation, is to stimulate lending to stimulate consumer consumption and ramp up production. Everybody roots for the recovery of the American economy, the most important in the world, but not everyone applauds U.S. monetary policy because of its effects on the global exchange market. In practice, the U.S. exports its crisis to the rest of the world, rather than contributing to the overall global recovery.


The FED had already indicated its willingness to issue additional currency. It would be its second major operation of this type. The only surprise was the amount, because analysts had bet on $500 billion. With basic interest rates at between zero and 0.25 percent per year since December 2008, the scope for action by the FED was extremely limited. Little or nothing was left than to throw more dollars into the market.



Critics of the U.S. policy like [Brazilian Finance] Minister Guido Mantega and some of his European colleagues have advocated another solution. It would be better, according to his rationale, to continue resorting to fiscal stimulus to revive consumption and production in the United States. The classic menu could include more public investment, which is a direct and efficient way of creating jobs and promote equipment manufacturing and mining industries.


President Barack Obama's electoral defeat in the midterm elections was bad news for those who hoped for a solution of this kind. The big winners were the most conservative elements of the Republican Party. They never came forward to stop the spending spree of President George W. Bush, which was responsible for the devastation in the public accounts. Containing federal spending was, however, one of Obama's main goals in the campaign that just ended.




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When the crisis worsened in the third quarter of 2008, the U.S. federal budget was already in poor condition. New expenditures were made to combat the recession. For some time, this policy seemed to deliver some results. But the economy started to falter again and now needs one more good push.


Any new fiscal stimulus program presented by the Executive will almost certainly confront strong resistance in Congress. The Republicans won a majority in the House of Representatives and the Democratic advantage in the Senate is smaller. President Obama will find it more difficult to negotiate new anti-recession packages.  



This has been, at least, the most common assessment from analysts. If correct, the U.S. economy will depend almost entirely on monetary easing to gain some momentum. Nothing guarantees this outcome. A policy of public spending would be much more reliable, especially if it's directed toward investment.


As for trade policy, it will hardly be influenced by the election results. Republicans tend to be less protectionist than Democrats, but everyone, for quite some time, will try to protect domestic production. The slower the recovery, the more lasting the tendency to closing off trade will be. There's no immediate prospect for major positive news.




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[Posted by WORLDMEETS.US November 9, 9:53pm]


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