The US Economy Impact on the Global Economy - Essay Example

? Global Economy By United s Quantitative Easing: Its Impact on the U.S. Domestic Economy and the Global Economy US Federal Reserve Chairman Ben Bernanke’s programme of quantitative easing aims to drive inflation that would lower the US Dollar value relative to other currencies. A liquidity overflow in the US banking system would decrease interest rates thereby raising the rate of capital lending in the real estate sector and augmenting revenues in the corporate division (Hudson 2010). In spite of possible inflation and devaluation of the dollar, quantitative easing could potentially revive the staggering economy of the U.S. (Sriram 2010). Whereas foreign investors to the US are profiting by loaning ‘devalued dollars’ to purchase government bonds and industrial securities and invest in foreign exchange and credit markets, foreign central banks, on the other hand, collect below 1% on the international treasury bills and bank securities (Hudson 2010). In 2011, Bernanke’s recommendation of another quantitative easing (QE II) is an additional $1 trillion liquidity in the Federal Reserve credit, aside from the $2 trillion reserve credits made in 2009 and 2010 would help the financial sector; solve the unemployment crisis and consumer expenditures; and revitalise the US economy. However, this second quantitative easing is not free of associated risks. Federal Reserve, treasury assistance and liquidity have been used by banks to maximise returns and disburse on high wages and bonuses. Capital lending has increased asset costs but decreased the production and employment. Inflation in asset costs has placed the FIRE sector (finance, insurance and real estate) beyond the true economic status of the country (Hudson 2010). Anchored in the wrong assumption that the QE policy of granting liquidity will be an opening for the banks to profit from loans, thus freeing them from debts, Bernanke failed to consider that almost 80 percent of US bank lendings are mortgage loans and that around 30 percent of the US real estate is experiencing economic inequities due to asset prices that have failed to keep up with mortgage liabilities. The collateral loaned for these mortgages do not cover the principal cost and property titles seem to lose protection as the real estate sector is sometimes managed in fraud (Hudson 2010). US Treasury Secretary Geithner (2010) explains that reviving the credit flow would only create more debts. The credit flow would allow real estate buyers and stock market financiers to employ further control over debts to propose asset costs back up to save the banking system against the previously negative equity it has befallen. Geithner describes it as steadying the failing banking system. The Fed hypothesises that for the country to regain its high economic status, the national banking system would loan out the almost-free limitless liquidity at a markup. Such recuperation would be generating more debts. Bankers, businesses and homeowners would be liberated from their negative equities and the corporate sector and housing market would likely boost again. However, since 2007, the banks have implemented high restriction standards in loaning out to businesses, homeowners and consumers. The increased rate from zero to 3% has been crippling these debtors with liabilities in their credit cards, mortgage and bank loans (Hudson 2010). The US quantitative easing is diminishing the dollar value against foreign currencies with floating trade rates whilst increasing the dollar supply. The impact of the policy on exchange rates between the US currency and the floating-rate currencies is not surprising. It is the obvious outcome of the dollar devaluation from the excess flow of dollars. Moreover, foreign investors tend to purchase other currencies not prone to volatility and inflation (Feldstein 2011). One of the objectives of Bernanke’s QE schema is the encouragement of domestic activity within the US and the lessening of further depreciation, however, the generated surpluses on the dollar supply likewise influences the intercontinental dollar valuation. Foreign investors previously transacting with the US may be inclined to diversify and purchase foreign stocks and bonds. Such diversification would escalate the valuation of those currencies. In addition, because the European Central Bank has made public that it has no intention of implementing the quantitative easing schema; naturally, investors will have a stronger preference for the European bonds than the US bonds. Similarly, Sweden, Brazil, South Korea and other rising market nations with stable inflation rates are good prospects for diversification ventures, thus resulting in their currency appreciation (Feldstein 2011). To some proponents, QE II is an assault on the domestic and international economies. Bringing the US Treasury out of negative equity could be at the expense of foreign countries, and in the process, causing instability in the global currency. A stable international currency is supposedly an important prerequisite for strong and lasting relationship within trading nations. QE II programme presumes that global prices are founded on comparative cost levels for commodities and services. However no more than 30% of U.S. incomes are used for purchases of goods. A big portion of US incomes is expended on taxes, insurance, finance and real estate. Housing service takes in 40% of the entire US income whilst 15% goes to debt service. Social Security and Medicare taxes take up 11%, and taxes on income and sales absorb 15 to 20%. Merely a little is left for purchase of commodities and services. The immense charges create high living costs that tend to make the US industry non-competitive in the global market (Hudson 2010). Today, the circulating US currency in the global economy is being pumped back into the US Treasury. When foreign traders present their dollar receipts to their respective banks in exchange for their currency, these banks subsequently hand over the receipts to the central bank. The central bank either trades the dollars on the foreign exchange market or purchase additional US Treasury securities, hence keeping the US dollar within the US economy. These capital inflows do not give solid assets creation or employment; instead the inflows only inflate foreign currencies against the dollar, pressuring exporters outside the international trade and causing dislocations in the domestic employment and market schema (Hudson 2010). These economic risks do not set the basic production costs but shape the current exchange rates. In terms of comparative income rates, foreign central banks receive 1 percent on their US Treasury bonds whilst US financiers buy up the global assets. In consequence, U.S. representatives are commanding that other trading countries give up their market excesses, personal reserves and general financial extras to U.S. financiers, creditors, bankers, entrepreneurs and vulture funds in trade for the 1% return on U.S. dollar reserves of declining value, as well as in sums further than the U.S. economy’s capacity to produce a well-balanced currency excess to pay these obligations to foreign governments (Hudson 2010). The US quantitative easing, as seen today, is not generating sufficient demand boosts and new employment in the US because the excess printed money is pouring out to foreign countries. Consequently, these nations particularly Argentina, China, India and Turkey are pressured to inflation. Similarly, Japan and other nations’ action of depreciating their currency through purchase of foreign currencies are spreading out to other countries, which in effect are likely to follow (Padmanabhan 2010). The effect of the upcoming second quantitative easing would have on the economy remains unsure. QE II possibly would add to moderately advanced economic development through better mortgage refinancing, which may liberate the cash flow to stimulate consumer expenditures, and more inexpensive financing for businesses to support expansion or improve economic conditions. Moreover, buyer and business assurance may perhaps be improved by the lessening of devaluation panics. Today, it is uncertain if the reduction of mortgage rates would considerably affect refinancing levels, given that mortgage rates are by now at generational lows and several property holders are cornered in deeper mortgages. Furthermore, balance sheets have excess cash, but still business investment spending as liquidity assets proportion continue at their lowest level in over five decades. QE II might harm bank productivity; and amplified national and international amalgamation and purchase actions could devastate domestic and global employment. However, its effect on market exchange and foreign exchange, at least in the short-term, would considerably influence a better economic position (Morrison 2010). Global Imbalances and the Economic Relations between the United States and China The dilemma of global imbalances is broadly observed as an important concern to be resolved in order to sustain a recovery for the global economy. This crisis is further argued as a materialisation of the present economic relations between the United States and China. Today, the US is experiencing huge trade deficits due to its over-consumption beyond the country’s wealth. China, on the other hand, is on the rise, producing great trade surpluses from its goods exportation. These surpluses are invested in the US Treasury, thus likely influencing the over-consumption in the United States. US economists are appealing to the Obama administration to impose not less than 20% tariff on Chinese imports. Nevertheless, it is false to assume that shifts in US and China currency levels would liberate the US of its declining economy. It is likewise confusing to see global imbalances as mostly a US-China issue (Khor 2010). Elliot Turner (2010) assumes that global imbalance and global instability are attributable to the status of the Dollar. Several spectators predict a collapse of the US dollar in the near future due to its volatility and devaluation in the past few decades (Gang 2006). Since the 1990s, the international economy has been gradually reliant on the US economy, whereas the US has been placing heavy reliance on foreign investments to fund its demand (Cooper and Madigan 2004). The global dependency on the US Dollar can be explained as: More than 50% of the entire US currency is circulated around the world; around 50% of the US treasury securities are used by all foreign central banks as their reserves; and the US dollar is the leverage responsible for the stability of the world’s currency trade (Gang 2006). Even during the administration of Bush, the US economic deficits were soaring at almost 3% of the Gross Domestic Product (GDP). In 2005, the account deficit was at 7% of GDP with an expected further instability. The central banks of China, Japan, Korea, Singapore and Taiwan are communally holding around $1.14 trillion in US Treasury bonds/securities as their reserves. When the purchases of the said nations are decreased, the US dollar value falls, however, when their purchases are increased, these countries are confronted with greater risks of the dollar devaluation (Gang 2006). Politicians, economists and business strategists worldwide blame China’s incapacity to raise the value of its Renminbi (Chinese currency) for the present global trade imbalance and currency instability (Bergsten 2006). Gang (2006) asks: “How much revaluation of the RMB would remove the US deficits of $700 billion, or at least the US-China trade deficit of $200 billion?” China’s economic challenge starts from two bases: (1) the country’s immense trade extras that create currency inequality due to its incapacity to lend to investors in its own renminbi, thus the accumulation of foreign currencies, mostly the US dollars in its treasury; and (2) American and Chinese economists misguidedly relate cash inflows excesses to the depreciating renminbi. Since 2004, the renminbi is in continuing appreciation against the dollar of 6% or more yearly. The decline in the U.S. interest rates since four years ago magnetises cash inflows as well as hinders private assets outflows from funding China’s large market surplus. This one-directional gamble in the foreign exchange markets cannot be balanced anymore by comparatively short interest rates in China compared to the US interest rates in 2005 and 2006. The People’s Bank of China (PBC) consequently becomes China’s exclusive global economic mediator and thus should interfere seriously to stop the renminbi from going up (McKinnon and Schnabl 2008). Regardless of substantial attempts by the PBC to sterilize the financial outcomes of the reserve upsurge, inflation in China is mounting, with surplus liquidity that overflow into the global economy. China’s currency, from deflation to inflation status on American and European price levels, has created a global currency mismatch. However, a rise in the renminbi value would not mean a reduction in China’s market surplus. Fiscal control and private sector assistance for China’s surplus would oblige to return to the 1995 to 2004 fixed yuan/dollar rate (McKinnon and Schnabl 2008). What the US and China need are alterations in the structure and rearrangement of exchange rates. Both nations should contribute to international demands, for instance, salary raise and increased employment. Household wages in both nations do not balance with their economic growth. Coordinated monetary and fiscal policies; structural improvements in the rates of exchange; and joint obligations to economic development by every nation would accomplish a restoration of the global trade balance. Moreover, fundamental to the collaboration approach is a freshly structured international reserve system or an extension of the IMF cash flows. Through this, there would be no obligation for the developing nations to hoard big amounts of dollars as protection against global unpredictability (Turner 2010). Joseph Stiglitz, an expert on the subject of global trade imbalances, suggested an answer to the global economic disproportion: Recommence global growth and currency appreciation will surely follow. To restart growth will be an initiative from every government with the capability of increasing total demand. The United States, as a major contributory factor to the global crisis and as one of the very few countries that can borrow at small interest rates, plays a special role in restoring global economic growth. High productivity investments by the US, such as high-speed trains and green technology would essentially perk up the US balance sheets. Alongside high production are high economic expansions that would create further tax proceeds, and decreased national debt. Such route would be beneficial not solely to the United States but likewise to every nation in the world. Improved economic growth and industrial expansion could optimistically have short-run and long-run impact on the global economy (Stiglitz 2011). G20’s Role in Tackling Global Imbalances Since its founding in 1999, the G20 has been tackling world's issues on economics and finances. Its birth came about after the Asian financial catastrophe revealed a need for leaders worldwide for active involvement on prime economic, financial, social and political matters. All summits of the G20 since 2008 to 2010 dealt with the administration and organisation of financial and fiscal policies through a financial calamity, a downturn, and a resurgence. In November 2011, G20 leaders met in South Korea to discuss the rescue of the international financial system from global insecurity and chaos (TD Bank Financial Group 2010). At the 2009 G20 summit in Pittsburgh, leaders from the First World Countries, particularly the United States and the European Union, suggested a new framework for tackling global trade imbalances. The objective of the agenda was to attain mutual agreement among nations for a sturdy, more sustainable and balanced global growth and to address issues on imbalances that led to the crisis the world has today. The call for a significant universal financial restructuring ultimately worked as a unified background to accomplishing these goals (TD Bank Financial Group 2010). The drive on global imbalances was partly encouraged by the US opinion that high reserves charges in export-based emerging economies aided the materialisation of the global financial crisis through their large trade surpluses that lowered loaning rates by US investors. However, that judgment was disagreed by leaders from nations with high trade surpluses, saying that the conundrum was triggered by the misdistribution of excessive international assets and the mismanagement of deficient regulatory financial sectors of the more powerful nations (Guha and Luce 2010). In the 2010 Toronto summit, G20 leaders identified the urgent need to take ‘exit’ tactics for the mounting national debt levels; however, opinions deviated because of the contradictory individual recurring and organisational situations which were manifested in the irregular development outline that begun shaping the global revitalisation as developing nations progressed forward, whilst the highly developed nations staggered. The US proposed a more flexible exchange rate and for all nations to consider vulnerabilities en route global recovery and to carefully employ economic exit strategies. The G20 summit concluded an agreement to rebalance the global growth without risking the economic recovery; to reduce deficits by no less than 50% by 2013; and to alleviate or decrease the concerned nations’ debt-to-GDP ratios by 2016. The G20 meeting ended with a call for “strengthening social safety nets, enhancing corporate governance reform, financial market development, infrastructure spending, and greater exchange rate flexibility in some emerging markets” (TD Bank Financial Group 2010). References Bergsten, C.F. 2006, ‘Clash of the Titans’, Newsweek. April 24, 2006. Cooper, J.C. and Madigan, K. 2004, ‘U.S.: Could Trade Imbalances Topple the Greenback?’, Bloomberg Business Week [Online] Available at: http://www.businessweek.com/magazine/content/04_48/b3910036_mz010.htm [Accessed 12 January 2011]. Feldstein, M. 2011, ‘Quantitative Easing and the Renminbi’, Project Syndicate [Online] Available at: http://www.project-syndicate.org/commentary/feldstein30/English [Accessed 10 January 2011]. Gang, F. ‘Global Imbalances and the US Debt Problem - Should Developing Countries Support the US Dollar?’, Fondad, The Hague, December 2006. Geithner, T.F. 2010, ‘Treasury Secretary Timothy Geithner tackles five myths about TARP’, WealthVest [Online] Available at: http://www.wealthvest.com/blog/wade-dokken/treasury-secretary-timothy-geithner-tackles-five-myths-about-tarp/ [Accessed 11 January 2011]. Guha, K. and Luce, E. 2010, ‘Deal on global imbalances sought at G20 summit’, Financial Times [Online] Available at: http://www.ft.com/cms/s/0/f7b772a4-a315-11de-ba74- 00144feabdc0.html [Accessed 12 January 2011]. Hudson, M. 2010, ‘U.S. “Quantitative Easing” is Fracturing the Global Economy’, Global Research [Online] Available at: http:// www.globalresearch.ca/index.php?context =va&aid=21716 [Accessed 11 January 2011]. Khor, M. 2010, ‘Global Imbalances Are Much More than the US-China Relations’, Triple Crisis [Online] Available at: http://www.triplecrisis.com/global-imbalances-are- much-more-than-the-us-china-relations/ [Accessed 10 January 2011].  McKinnon, R. and Schnabl, G. March 2009, ‘China’s Financial Conundrum and Global Imbalances’, Bank for International Settlements Working Paper No. 277. Morrison, J. 2010, ‘Global Economy Recovery Continues to Lose Momentum’, Morning Star [Online] Available at: http://www.morningstar.co.uk/uk/news/article.aspx? articleid=92741&categoryid=690 [Accessed 11 January 2011]. Padmanabhan, A. 2010, ‘The downside risk of quantitative easing is emerging asset bubbles’, iStockAnalyst [Online] Available at: http://www mail.istockanalyst.com/article/viewiStockNews/articleid/4647263 [Accessed 12 January 2011]. Sriram, K. 2010, ‘Quantitative easing will impact emerging markets’, The Economic Times [Online] Available at: http://economictimes.indiatimes.com/features/financial- times/Quantitative-easing-will-impact-emerging-markets/articleshow/6959956.cms [Accessed 10 January 2011]. Stiglitz, J. 2011, ‘A currency war has no winners’, Guardian News and Media Limited [Online] Available at: http://www.guardian.co.uk/commentisfree/cifamerica/2010/nov /01/currency-war-no-winners [Accessed 11 January 2011]. TD Bank Financial Group, 2010, ‘Tackling Global Imbalances is a Tall Order for G20’, Action Forex [Online] Available at: http://www.actionforex.com/analysis/daily-forex- fundamentals/tackling-global-imbalances-is-a-tall-order-for-g20-20101110126457/ [Accessed 11 January 2011]. Turner, E. 2010, ‘QE2, Global Trade Imbalances and Currency Manipulation’, Seeking Alpha [Online] Available at: http://seekingalpha.com/article/236025-qe2-global-trade-imbalances-and-currency-manipulation [Accessed 10 January 2011]. Read More

 

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