This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

QE2's Unintended Global Consequences

Fed Chairman Ben Bernanke did the right thing in launching QE2 last week. Nevertheless, it's spawned a rash of criticism from the likes of Kevin Warsh, Germany's finance minister, and Sarah Palin.

On a recent trip to China, I got a chance to read the excellent In Fed We Trust by David Wessell about Bernanke and his recent years at the Federal Reserve. What was clear in the profile is that, while Bernanke acknowledges that he was slow to see the extent of the subprime problem coming in 2006 through the first half of 2008, he has been aggressively doing "whatever it takes" ever since to slay the dragon of a deflation-driven recession.

After a life in academia studying the Great Depression and -- more recently -- Japan's travails from a 20-year deflation slide, Bernanke has good reason to fear an economy falling back into a quicksand pit.

Bernanke knows two things about his public perception. First, he, like politicians, gets no credit for any actions he took that prevented problems from happening two years ago and second, there's an inherent bias that the Fed and certainly among the mainstream press and the public to fear inflation much more than deflation.

As late as early September 2008, Bernanke was fighting fellow Fed governors' hearts and minds against the imminent threat of inflation. Runaway inflation is a much easier concept for Glenn Beck to diagram on a chalkboard compared to runaway deflation. What's the schematic for that?

So, three cheers for Bernanke taking action last week. He and the Fed governors have a dual mandate: full employment and price stability for the US economy. Given the data and where we are in this recovery, the Fed made the right call.

But Ben Bernanke doesn't have responsibility for the rest of the world and, unfortunately, there will be challenging unintended consequences of his actions last week on other emerging economies.

Specifically, China and other economies -- like Hong Kong -- with their currencies pegged to the US dollar will feel added inflationary pressures on their already strong economies. Simply put, Bernanke's explicit prescription for healing the U.S. economy is now gas being poured on to already hot economies who bounced back remarkably quickly from the crisis two years ago.

In a recent letter to his investors, renowned hedge fund manager Paul Tudor Jones complained about the Chinese yuan's peg to the US dollar: "On January 1, 1994, China devalued its currency by 50% in a single day, and since then has experienced a manufacturing boom. After 15 years of impressive productivity gains relative to its trading partners, though, it now resists the smallest appreciation.... "As someone who has traded foreign exchange since 1980, I believe the RMB/USD rate is currently the single most important of all exchange rates. It not only drives the largest foreign trade relationship in the world, it also drives virtually every other exchange rate globally. Dozens of other emerging market countries suppress their exchange rate against the US dollar because the RMB is effectively pegged to the dollar."
1 of 3

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
AAPL $95.18 1.64%
FB $117.43 -0.96%
GOOG $692.36 -0.84%
TSLA $232.32 -3.92%
YHOO $36.01 -1.42%


Chart of I:DJI
DOW 17,750.91 -140.25 -0.78%
S&P 500 2,063.37 -18.06 -0.87%
NASDAQ 4,763.2240 -54.37 -1.13%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs