Dangerous Dollars

For Brazil, the decision of the [U.S.] Federal Reserve to inject an additional $600 billion into circulation by the middle of next year may turn out to be costly. The plan is to issue about $75 billion per month in yet another effort to revive the U.S. economy, which is still suffering from a low level of activity and an unemployment rate above nine percent. The Fed will use this money to purchase U.S. government bonds held by the public. Dollars will continue flooding the markets, thereby forcing the revaluation of the Brazilian real and other currencies. Brazilian producers will have major difficulties not only for exporting, but also for competing in the domestic market, since their currency is already one of the most highly priced in the world. The Chinese will continue to maintain the advantage over most of their competitors since they will find a way to maintain their undervalued yuan, albeit perhaps by a little less than usual in order to show a measure of “good will.”

The Fed’s objective, according to the official explanation, is to stimulate credit operations so as to encourage consumption and boost production. Everyone is rooting for a recovery of the American economy, the world’s most important one, but not everyone is applauding U.S. monetary policy because of its effects on international exchange markets. In effect, America is exporting its crisis to the rest of the world rather than contributing to a global recovery.

The Fed had already indicated its readiness to issue more money. It would be the second large operation of this type. The only surprise was the amount, as analysts had forecasted $500 billion. With basic interest rates in the range of zero to 0.25 percent per year since December 2008, the possibilities for action on the part of the American central bank were very limited. Few or no options remained other than putting additional dollars into play on the market.

Critics of the American policy, such as the [Brazilian] Minister Guido Mantega and some of his European colleagues, had argued for a different solution. It would be better, according to their reasoning, to continue resorting to fiscal stimulus to reactivate consumption and production in the United States. The classic menu could include additional public investments, a direct and efficient manner of creating employment and stimulating equipment and materials industries.

The defeat of President Barack Obama in the midterm elections was very bad news for those who were hoping for a solution of this type. The principal victors were the most conservative group of the Republican Party. They had never mobilized to put a stop to the orgy of spending under President George W. Bush, who was responsible for a vast deterioration in the public accounts. Limiting federal expenditures was, nonetheless, one of their principal campaign issues in the recent elections.

When the crisis became acute, in the third quarter of 2008, the Federal budget of the U.S. was already in bad shape. New spending was undertaken to combat the recession. For a while, this policy seemed to be producing some results. But the economy weakened again, and another big jolt is now necessary.

Any new program of fiscal stimulus presented by the Administration will, almost certainly, meet with strong resistance in Congress. The Republican Party gained a majority in the House of Representatives and the Democratic advantage in the Senate became much tighter. President Obama will have great difficulty in negotiating new stimulus measures.

This has been, in any event, the most common assessment of analysts. If it is correct, the American economy will depend almost entirely on monetary loosening in order to gain some steam. Nothing guarantees such a result. Far more reliable would be a policy of public expenditures, directed principally toward investments.

As far as trade policy is concerned, the results of the elections are unlikely to have much influence. Republicans tend to be less protectionist than Democrats, but everyone — at least for a good while — will try to protect national production. The slower economic recovery is, the more long-lasting the trend toward trade restrictions will be. There is no immediate prospect for significant positive developments.