Quantitative Easing II and more

By Li Hong

It looks very likely that the Federal Reserve's QE2 of pumping $600 billion by June to the global economy will fall short of saving Washington and preventing U.S. from a dip. It probably needs 10 times of that amount to effectively bring down the "true price" of America's wages and set them on a level playing ground with workers in Brazil, Russia, India and China, the four so-called "Bric[k]" countries.

However, the hypothetical 6-trillion move won't have any chances, because it will open the Pandora's box for not only the United States, but the whole world. American families by no means can withstand an appallingly diminished livelihood as the dollars buy less and less. The Fed officials would have been cursed and inundated with spits for sending their countrymen back to a life more than 100 years ago.

Spooked by the H-move and the prospect of hyperinflation, other countries would compete to downpour their dollar reserves and snatch up whatever they could buy on the market. The world's top reserve currency position of the greenback would fall on the ground, taken up immediately by euro, and later, a currency of one of the "Bric[k]" states.

Economists, including a rising number of American ones, have claimed that only when American wages are brought down to a level identical to that of Mexicans or Vietnamese, the country won't regain its competitiveness on the global market place. I would put it at least a halving of their current salaries. And, the hypothetical $6 trillion money-printing by the Fed is certainly capable of doing it.

It won't be easy to bring jobs back to America, especially those mediocre-paying manufacturing jobs, because labor costs in its trading partners are ostensibly lower. The multinational companies are chasing the maximum of profits so that places with the lowest production cost would hold onto the jobs. Take China for instance, since earlier this year the government ordered the minimum wages be raised, some multinationals have moved or are considering moving to other places.

Governments and ordinary people are debating QE2 by the Federal Reserve. Leaders from Europe, Russia and China probably would call for explanations from Washington, because prices of commodities denominated in dollars have all risen lately. Some small economies are restricting inflow of speculative "hot money" buying local securities and stocks. And, in the following months, more countries and regions will ratchet up macro oversight and tighten monetary control.

For the United States, the Fed's easing policy will weaken the dollar further – meeting Obama administration's expectation that a weak currency will increase U.S. exports while curb imports, helping the U.S. economy slightly, as some pundits have strongly believed. But, a hike in prices of commodities like oil will put a damper on it, offsetting any economic benefits that might derive from a weaker dollar.

And, the middle-class American families would have to shoulder the bulk of the oil price rises, restraining their ability to consume other products and harming an already fragile recovery. Since the breakout of the 2008 financial crisis, they are snapping shut their pockets. Therefore, a policy aimed at "quantitative easing" probably will have the impact of "quantitative hardening" on the broader economy.

The elitist economists in America have rendered Ben Bernanke for not being brave enough to come out with a bigger "easing" trunk that will help the country avoid the Japan-style deflation. These elitists believe that only a moderate inflation could fan out American families to spend, spend and spend. And, $600 billion is just not sufficient to stir up inflation. I have heard a similar voice saying "Shaming on all Americans for withholding their money from the economy!"

Here is an American reader's response to QE2 from an online outburst:

"We're waiting this thing out. We're substituting all kinds of stuff now for stuff which we would have, in the past, ‘purchased', that is, run up on our credit. I guess that makes all of us "deflationists", right? So be it. We'll keep repairing our cars ourselves. We'll keep doing our home repairs ourselves. We'll barter some stuff.

"Monetary policy or fiscal stimulus policy? Who gives a rip? Most of us don't understand it. It sounds like something that will just get more money to circulate among those who are already doing okay or pretty well. We don't have their options. We have to make do for the present. We're not interested in buying new stuff. Well, we can't buy new stuff. We already have a load of old stuff to pay off."

So, after QE1 and QE2, will there be QE3 and more in the pipeline? It will mean a constant weakening of the dollars, and coherently, a weakening of a power.