The World Reacts to QE2

Markets everywhere are taking a breather today after yesterday’s epic run-up, induced by the Federal Reserve’s announcement of Quantitative Easing 2.0. Meanwhile, leaders in other countries are delivering scathing reviews of QE2…

  • “As long as the world exercises no restraint in issuing global currencies such as the dollar – and this is not easy – then the occurrence of another crisis is inevitable,” says Xia Bin, an adviser to China’s central bank
  • Brazilian finance minister Guido Mantega – who warned in September the United States was launching a “currency war” – was more direct: “Everybody wants the US economy to recover, but it does no good at all to just throw dollars from a helicopter”
  • Germany’s finance minister Wolfgang Schäuble was the most blunt of all, saying QE2 won’t solve America’s problems, but it will “create extra problems for the world.”

“With all due respect,” Schäuble added, “US policy is clueless.”

Just a wild guess here…but this doesn’t bode well for President Obama at the G20 summit next week. He might want to dial back on Treasury Secretary Tim Geithner’s scheme to have everyone limit their trade surpluses and deficits to 4% of GDP.

On that subject, China just issued its first official comment: “We believe a discussion about a current account target misses the whole point,” says deputy foreign minister Cui Tiankai.

“If you look at the global economy, there are many issues that merit more attention – for example, the question of quantitative easing.” (Just an example, of course.)

More choice words from Cui: “The artificial setting of a numerical target cannot but remind us of the days of planned economies.” Ouch.

The summit is next Thursday and Friday in Seoul, Korea. Usually these gatherings are the stuff of mealy-mouthed joint communiqués and awkward photo ops. But for this one, we might want to grab the popcorn…

Even as the rest of the world savages the Fed’s actions this week, Fed leaders are gathering today for a celebration…at the scene of the original crime.

“A Return to Jekyll Island: The Origins, History and Future of the Federal Reserve” is the official name of the two-day conclave at the Georgia resort where plans to form the Fed were first hatched in secret this very month 100 years ago. (The Morgan and Rockefeller men in attendance were on a duck-hunting trip, it was claimed at the time.)

This affair promises to be more public. The final panel discussion tomorrow, featuring Ben Bernanke, Alan Greenspan and Goldman Sachs managing director Gerald Corrigan – will be webcast live.

Of course, real Fed transparency would come in the form of a full audit. Rep. Ron Paul, for what it’s worth, is promising to press again next year…and he’s sounding confident that unlike 2003 and 2005, the Republican leadership will actually let him chair the subcommittee on domestic monetary policy.

“I will approach that committee like no one has ever approached it because we’re living in times like no one has ever seen,” he said yesterday. Better stock up on that popcorn…

Dave Gonigam
for The Daily Reckoning