There have been many events in the monetary policy galaxy and most of them albeit high profile, are, at best distracters. The reason we brand statements by US president, Chief of PIMCO and the heads of the US and EU central banks as distractions is because every statement made by these people in influential positions have proved to be plain posturing to shore up the falling US dollar. The strong peg of the Chinese and US currencies was the key point during the Asia tour of the US president. The ramifications of the abrogation of that peg are politically undesired and hence it would be confined to just words and not deeds.
Devaluation of the US dollar is continuing unabated. China is the country that is apparently losing the most due to the continued devaluation of its foreign exchange assets. However in the greater universe of complex geo-political relations it could be a very small price to pay for causing a radical change in US policy of containment of China in political and military spheres.
However the smaller players in Asia do not have that leverage and are left with a tough choice between rampant inflation and massive unemployment and for the present they are sticking with the former. Vietnam is the worst affected and the local currency (the Vietnamese Dong) is losing its significance as a medium of exchange with most long-term (greater than 3 months) contracts being settled in terms of gold, bypassing the local currency.
The graph (chart 1) comparing the currencies of a few countries against the universal standard, gold shows that some countries like Brazil and Australia have taken effective steps to contain massive devaluation of their currencies in the past year. India has injected about 18% cash into its economy through official and unofficial channels. The effects of importing inflation due to an unviable economic model can be seen on the Vietnamese Dong. The ill effects of quantitative easing can be witnessed in the movement of the US dollar during the past year.
The devaluing dollar is not helping reduce the trade deficit of the USA. Exports have marginally increased by 2.9 percent over the past month imports registered a significant growth of 5.8% over the previous month and the chief reason for that was crude oil. Albeit this development underscores the limitations of unbridled devaluation, it could not change the monetary policy adopted by the USA.
Wasteful public expenditure reaches its zenith during a recession purely to boost GDP numbers and it generally exacerbates the situation and delays the recovery. Germany has also backtracked on its former policy of fiscal prudence even as it falls behind Italy in terms of budget deficits. UK remains steadfast in it policy of quantitative easing even as inflation starts to trouble the general economy. Many states in the USA lead by California are in the midst of massive budget deficits. This phenomenon is global and part of the massive stimulus spending in China is finding its way into building empty cities like Ordos in Inner Mongolia. GDP numbers in USA are also being boosted with inaccurate accounting that does not consider outsourcing at all and the net result is greater outsourcing justifying the idiom ‘a stitch in time saves nine’.The recent growth in Japanese GDP is not being celebrated, as they have been though many rounds of hope and despair. Dollar carry trade is strengthening the Japanese Yen and is contributing to deflation in Japanese consumer prices.Inflation in USA registered a marginal increase of 0.3% as the brunt of the devaluation of the US dollar is being borne by the countries that have developed an economic model based on exports to the USA.