U.S. Quantitative Easing Shadows G-20 Summit

China’s Assistant Minister of Finance, Zhu Guangyao, had expressed concerns over U.S. policy for the second round of quantitative easing, and mentioned that he would be exchanging views with the U.S. at the G-20 summit prior to the official beginning of the summit itself.

The U.S. Federal Reserve announced recently a second round of quantitative easing and will be buying long term treasury bills worth $600 billion to stimulate the recovery of the U.S. economy. However, developed countries like Germany, and even emerging economies like Russia, Brazil and South Africa are all extremely concerned about this, as this will depreciate the U.S. dollar and increase commodity prices, resulting in an uncontrollable inflow of hot money into the emerging economies.

Numerous economists pointed out that a new round of quantitative easing is like a “helicopter drop of U.S. dollars,” with the aim of enhancing the competitiveness of the U.S. in international trade. This also includes an intention to transfer economic risk by depreciating the U.S. dollar to start a “currency war.” In view of this action, German Federal Minister of Finance Wolfgang Schaeuble said that pumping more money into the economy is useless.

Federal Reserve Chairman Ben Bernanke defended the second round of quantitative easing by saying that the aim of the Federal Reserve is to maintain price stability and create more jobs. However, the U.S.’ attempt to increase the money supply to solve its problems will create new problems for other countries. Russian Deputy Finance Minister Dmitry Pankin reinforced that the Federal Reserve’s actions will lead to the emergence of financial bubbles and an imbalance in currency exchange rates: “It is not the U.S., but developing economies that can be affected.”

The U.S. is the world’s major currency-issuing country; therefore, excessive liquidity will create problems for other countries. When financial institutions around the world have large amounts of cash, these funds will flow to emerging economies and cause these economies to become volatile. South African Finance Minister Pravin Jamnadas Gordhan said that when hot money flows to emerging economies, there will be a devastating effect on their exports. The French newspaper Le Figaro, in criticizing the Fed’s move, cited former President Richard Nixon’s Secretary of the Treasury John Connally: “The dollar is our currency, but your problem.”

Many years later, when people look back at this financial crisis and the post-crisis era policies adopted, they will probably be unable to avoid considering the degree of influence that the “quantitative easing” had on the world. The G-20 consists of countries with systematic significance. One should note the effects of such macroeconomic policy when the world economy is recovering and facing many uncertainties. A responsible macroeconomic policy should be adapted — otherwise, there will be damage to the G-20, whose main aim is economic cooperation. Gordhan said that the Federal Reserve’s policy had damaged the efforts of leaders during the crisis and went against the spirit of the G-20 Finance Ministers and Central Banks’ Governors.

The main purpose of the G-20 summit in Seoul is to promote the spirit of cooperation to help each other to succeed, benefit mutually and obtain a win-win situation. It also attempts to strengthen macroeconomic policy coordination. The unity of its members will give the world economy a positive signal, boosting confidence in the market by strengthening the world economic recovery. Some countries’ independent policies go against the spirit of helping each other to succeed, and also affect other countries’ attempts to coordinate macroeconomic policies. In view of this, an earnest dialogue in policies to achieve honest coordination will bring confidence to the world economy. A true promotion of the spirit of cooperation to help each other to succeed and achieve a win-win situation is the world’s expectation of the G-20 summit in Seoul.