- November 26, 2010
- Posted by: Ted Bullen
- Category: Economy, Government, Monetary Policy, News
Earlier this week, Forbes published an article by Shaun Rein, Managing Director of China Market Research Group. As we have done previously, he decries the Federal Reserve’s quantitative easing measures, saying (http://www.forbes.com/2010/11/22/ben-bernanke-wrong-quantitative-easing-leadership-managing-rein.html):
1) “Low interest rates and an increased money supply are worthless tools if companies don’t think there are ways to make money. More than a trillion dollars sits on the books of America’s largest companies in reserves for a rainy day, because they are scared about the future.”
2) “Global investors are rightly worried that with the U.S. money supply growing the value of the dollar will continue to drop.”
The effect is that large U.S. manufacturers are moving jobs and investing in countries to China and other, low-labor cost nations, such as Viet Nam. Rein asserts that this is causing the formation of “asset bubbles (formed when the prices of assets are over-inflated due to excess demand)…that could cause volatility if they popped” like the housing bubble.
As we have previously written, the Fed’s actions devalue the dollar, but instead of driving up prices of American exports, the Fed action is spawning currency wars, where other countries devalue their currencies. As well, the dollar, which is the world’s top reserve currency, stands to lose its place as we are seeing with the announcement, this week, that China and Russia have renounced the dollar and have decided to use their own currencies in bilateral trade. Losing reserve status only exacerbates the current speculation on commodities, which is causing food, clothing, and fuel costs to skyrocket.
Rein talks about America’s “addiction to debt” and proposes that the Fed should cut off the never-ending money supply and force the nation to undergo a painful, but needed restructuring, which includes the bolstering of manufacturing in the high end of the value chain, “where China and Viet Nam can’t compete.” This is a point that most agree on as it will promote innovation, create and bolster jobs and re-establish the strength of an economy, by weaning us off of our debt addiction.