Thursday, November 4, 2010

Shots fired in currency war against US

With so-called "quantitative easing" (funny video), the Fed is increasing the supply of longer term loans, which will bring down US interest rates.  This, in turn, encourages foreign borrowers to borrow in US currency, trade their dollars for, e.g., Brazilian real, and then invest in Brazil.

The increased demand causes the Brazilian real to appreciate relative to the dollar which makes Brazilian exports more expensive.  This leads to reduced demand for domestic labor in Brazil.  If wages cannot fall, then you get domestic unemployment.

Predictably, foreign governments are trying to stop this from happening:
China, Brazil and Germany on Thursday criticised the Fed’s action a day earlier, and a string of east Asian central banks said they were preparing measures to defend their economies against large capital inflows.

Guido Mantega, the Brazilian finance minister who was the first to warn of a “currency war”, said: “Everybody wants the US economy to recover, but it does no good at all to just throw dollars from a helicopter.”

No comments:

Post a Comment