Economics Tue Dec 07 2010

One Hot Dollar in Your Chinese Pocket

By Ben Schulman

The continuing clamor over the Federal Reserve's second round of quantitative easing seems poised to be elevated after last week's disappointing employment numbers were revealed. Fed Reserve Chairman Ben Bernanke is most likely getting as comfortable as one can get in the political cross hairs, as seemingly no matter what direction he moves in regards to monetary policy causes an uproar of contention. While the tenor of the anger may remain the same no matter what steps Bernanke takes, the frustrating sluggishness of the U.S. economy, the pervasiveness of the Great Recession's unemployment, and the dwindling bag of fiscal tricks that are left -- essentially, the catalyst for QE2 -- are indeed cause for serious concern.

On one hand, with the deteriorating situation all across Europe, the dollar and treasuries seem as if they are still relatively safe places for investment. But if the worldwide slump has taught the globe anything, it's that economic conditions on a global stage emerge from the handling of domestic situations, and in the U.S., the fiscal maneuvers to keep the financial ship steady are disappearing. The additional $600 billion purchase of bonds by the Fed may be a necessary step to further stabilize the market and try and get some true solid footing under the recovery, but it also hits off-center of the continuing problem (housing), and sends mixed messages about the value of U.S. currency. Such confusion can only embolden, and alienate, our trading partners.

Economic philosopher Georges Bataille stated in his book The Accursed Share that "It is not necessity but its contrary, "luxury," that presents living matter and mankind with their fundamental problems." It seems as if this dictum has come back to haunt America. Fatigued from a false sense of luxury fed by a glut of cheap credit, consumers aren't responding to any amount of propped-up liquidity to encourage them to spendthrift their ways towards economic salvation. It's not even that they're not responding necessarily, it's that the opportunity to spend isn't even out there, with increasingly marginalized credit lines and the continuing downward spiral of housing prices.

With approximately 70% of the U.S. economy still dependent on consumer spending, and immobilized by a drowning housing market, there is a literal sense of being stuck that makes it incredibly difficult to get out of neutral. It also speaks to the Fed and Obama Administration's off-target prescriptions that further kick the can on some murky economic theory of hope. Until a true solution addressing housing is delivered, such as Joseph Stiglitz's two-year old thoughts on how to do so, there will only be stops-and-starts in recovery, and even more well-intentioned and expensive prescriptions, such as Brookings' Mobility Banks, will be dreamt up to try and loosen the economy from itself.

On a macro-level, Republican fears of inflation or of a danger of a cheap dollar seem more base-level political pandering rather than grounded in any practical or policy-related measure. If QE2 works, and exports increase due to a cheaper dollar, there may indeed be signs of a real recovery. But there is the fear that a cheaper dollar, which lessens the value of all those treasury bills held in reserve by China, makes the U.S. somewhat of a less attractive place to gobble up debt. At the beginning of the recession, there were whispers of the world decoupling from the dollar, alienating America and marking the true beginning of a new economic order. As the recession spread from country to country, that proved to be a bit of a false alarm. Yet, a picture is developing of who's emerging and who's falling behind as the world's recession fades, as seen in the recent listing of the "30 Most Dynamic Cities in the World," and it's not encouraging that only one American city makes the cut.

The Chinese are the biggest players in this chess game as far as what the next step is for the U.S. With such a huge stake in America, and with a desire to keep the yuan low, China won't force anyone's move just yet. But as they stockpile more dollars, and as the world moves ahead, there will come a point in which the reserve currency of the world no longer need be green. In an effort to stem this possibility from happening, and keeping in mind that 70% stat of the U.S. economy depending on the grace of open wallets, QE2 might just be the beginning of many more easing efforts to come (if housing is simply never addressed). Ironically, if more quantitative easing is needed and indeed spurs spending, a majority of those goods, such as pants for example, will be coming from China. That's gonna be one hot dollar in your Chinese pocket.