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Jim Cook

 

RUNAWAY SOCIAL SYMPATHY

Every once in a while I switch the TV channel from Fox to CNBC to see what the liberals are saying.  After listening awhile I get a deep sense of hopelessness and foreboding for our country.  The most important thing for the left is giving money to people.  They are happy to see the growth of food stamps, disability payments, housing subsidies, free healthcare and all the other welfare benefits.  They utterly fail to see the damage it is doing to the recipients.  Whole cities that once flourished have deteriorated into rotting eyesores populated with shambling hulks of chemically dependent drones.  These people are no longer employable.  They have become incompetent and helpless and the liberals can’t see that it’s their doing.

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The Best of Jim Cook Archive

 
Commentary Of The Month
January 21, 2011
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GLOBAL OUTCRY AGAINST QE2
By Ron Hera

The announcement of QE2 touched off an international firestorm of controversy.  QE2 has been widely criticized by financial and political leaders representing U.S. creditors, exporters and emerging economies.  Nobel laureate Joseph Stiglitz has become an outspoken critic of QE2, warning that it poses a risk to emerging economics where asset price bubbles are already apparent.  European Central Bank (ECB) President Jean-Claude Trichet expressed the same concern.  The growing consensus on the part of emerging economies, such as Brazil, India, China, Argentina, Taiwan, Thailand, South Korea, Peru and Indonesia, is that capital controls are necessary to prevent excessive capital inflows, which can be highly inflationary.  The International Monetary Fund (IMF), which bailed out a number of smaller countries in 2008, has supported capital controls since February 2010.  The dilemma for exporters is that they must seek to control inflation, e.g., by raising interest rates, but must also debase their currencies to maintain their exports.  The only other option is to institute capital controls.  One of many critics, Brazil’s Finance Minister, Guido Mantega, warned that the U.S.-led currency war “. . .is turning into a trade war.”

The growing consensus is that inflation in Asia will damage Asian economies before Western countries, which are debasing their currencies, fully recover from the recession that began in 2007.  The trade relationship of the U.S. and China is in the eye of the storm and fears of a trade war are growing.  Debasing the U.S. dollar reduces the value of China’s U.S. Treasury holdings while China relies on exports to the U.S., totaling between $200 and $300 billion annually.  For exporters, QE2 is a doubly destructive policy since capital inflows are inflationary while exports are reduced due to currency appreciation.  The potential effects of a downturn in manufacturing resulting from falling exports, coincident with the bursting of an asset price bubble, is a formula for disaster.  As more countries begin to conduct international trade without using U.S. dollars, the world could be split into two camps.  For example, talks are taking place between the U.S. and Japan regarding the establishment of trans-Pacific free trade.

Interestingly, QE2 has the potential to “cash out” favored holders of U.S. Treasuries in exchange for U.S. dollars at their current value, i.e., before the U.S. dollar declines further.  China, Russia and Brazil are already reducing their U.S. Treasury holding and could be favored sellers of U.S. Treasuries to the Federal Reserve (through its intermediaries).  However, given the size of the U.S. federal deficit, the simplest explanation is the Federal Reserve is simply funding the U.S. government.