The future looks bleak for the economy of the United States. Currently, the U.S. is embroiled in a dispute about whether the decision by Federal Reserve chairman Ben Bernanke to purchase US$ 600 billion in bonds is the correct move. It seems that the U.S. government is out of options, and the fact that it is being left to the chairman of the Federal Reserve to try to boost the economy is a telling sign of America’s poor economic condition, as well as proof that political paralysis has made extricating themselves from this situation next to impossible.
There are many who are concerned that the United States is attempting to go down the route of artificially inflating their currency, in an attempt to boost their export markets and create jobs, which is something the United States has previously criticized other countries for doing.
Explaining the current situation requires some background on the relationship between the economies of the United States and China. China’s is an export driven economy, which means they are dependent upon strong demand from the rest of the world in order to fuel their economy. Though this is changing as millions of Chinese are rising from poverty and into the middle class, China is still reliant upon external demand, most notably from the United States.
In order to maintain their position as a dominant export driven economy, China artificially keeps their currency, known as the yuan or renminbi, at a low level. This lowers the cost of Chinese labour and creates an incentive for corporations to locate factories there. Why would a company spend four or five times more money to produce their products when they can produce it in China for a much lower cost?
America has seen steady erosion in their manufacturing base due, in part, to China’s currency policy. To blame all of America’s problems on other countries, however, would be short-sighted, and in a competitive world economy America must innovate and compete, not complain.
Recently, though, the situation has reversed itself in an ironic way, and this brings us back to the decision by the Federal Reserve chairman to purchase US$ 600 billion in bonds. This bond purchase will have the effect of reducing the value of the U.S. dollar, which is also a way of artificially inflating the currency.
Inflation will reduce the value of the American dollar, and this will lower the cost of labour in the United States, just as China’s currency manipulations have done for them. The Obama administration is denying this, however. They say that the goal of the move by the Federal Reserve is simply to boost the U.S. economy, not lower the value of their currency. Of course, this is to be expected, as it would be diplomatically unwise to openly acknowledge that you are purposely manipulating your currency.
China is complaining about this latest move by the United States, but it is hypocritical for them to do this, as America is simply following China’s example and taking action to boost their exports. Indeed, Obama has declared that he wishes to double America’s exports in the next five years, and this appears to be one step towards that goal. What America should be concerned with, however, is the loss of credibility this move could cause among their economic allies.
The recent G20 meetings in Seoul, South Korea revealed rifts among the G20 nations when it comes to deficit reduction and the path forward out of the recession. While many European countries, most notably Great Britain, are implementing vast cutbacks to their budgets, the United States is still on the course of printing more money and maintaining high spending levels. This disunity in policy has made America look irresponsible and unwilling to make the tough decisions, and this new move to strengthen their exports at the expense of the world economy will only create more antipathy towards the economic strategy of the United States.
America has no easy choices moving forward. It is likely that they will be forced to both increase taxes and cut services, or do one of those things to a huge degree, which will be political suicide for all but the most grounded and persuasive leaders.