The Fed’s “quantitative easing” is a show of national strength

I wrote last week about the U.S. Federal Reserve’s “quantitative easing.”  This is the purchasing of billions of dollars of debt by the Fed in the open market.  Each time they purchase some debt it adds U.S. currency to the global marketplace.  The greater the supply of U.S. dollars, the lower the price of the U.S. dollar.  So effectively QE is a way of weakening the U.S. dollar.  The weaker, that is, the cheaper the U.S. dollar the more expensive are imports and the cheaper are exports.  Not surprisingly then, the rest of the world is whining about the quantitative easing policy as their goods are made less affordable and hence their economies are made weaker.

This week Russia, China and the eurozone have all complained publicly about the policy.  But since World War II the U.S. has basically had in place a free-trade economy.  That is, the barriers to trading with the U.S. are massively lower than they are for other nations.  This open-door policy was put in place consciously at the close of World War II at the famous Bretton-Woods conference.  Because most of the industrialized world had been devastated by the war, only the U.S. could afford to finance a rebuilding.  It was in the U.S. interest to do this because we needed people to buy our goods and services.  So one of the ways that we did this as a nation was to have a free-trade policy.  U.S. markets were open to cheap goods.  When we bought goods from Europe, China, Korea and Japan we were providing currency for these nations to rebuild themselves.

Fast forward 65 years from the end of the war and these sorts of policies do not serve the United States.  The economies of Europe, China, Korea and Japan have the ability to stand on their own without the need of the U.S. consumer.  It is time for these nations to switch from reliance on the U.S. consumer to reliance upon their own citizens.  The Federal Reserve’s quantitative easing will have a negligible effect on the actual quantity of dollars.  However, it dramatically signals a very new approach to the global economy of the future.  Let’s hope that this policy is continually implemented and gracefully.  The net result will be a U.S. economy that hopefully is a net exporter, rather than importer.  And that will mean that the U.S. starts to deleverage a portion of its gargantuan national debt.

So quantitative easing is a show of national strength.

Jason