"Huh?!" is Greg Ip's reaction to Sebastian Mallaby of the Council on Foreign Relations, which has indeed fallen on sad times:
QE2 and the Fed: QE is unconventional monetary policy, but it is monetary policy nonetheless. When either conventional or unconventional monetary policy eases, certain things are supposed to happen: long-term yields fall, stocks rise, the exchange rate declines. All of which is happening now. If the Fed had just cut the Federal funds rate from 3.5% to 2.75% (roughly the equivalent of what its $600 billion in Treasury purchases should achieve), we should have expected exactly the same results, without [Mallaby's] sturm und drang about currency wars.... [C]urrency manipulation... unsterilised foreign-exchange intervention, for example, such as the Swiss National Bank and Bank of Japan.... But that’s not what the Fed is doing. It is simply trying to do to long-term rates what it has already done with short-term rates....
I think [Mallaby's confusion] stems from a misconception of what QE does.... Purchasing bonds with newly-created bank reserves will only expand the overall domestic supply of credit if banks on-lend the extra reserves. That is not happening.... Nor does QE create foreign liquidity; the Fed can do many things, but printing foreign currency is not one of them....
The Fed does not create Brazilian reals: but it may make investors willing to pay more for real-denominated assets. Before foreign countries try to resist that, they should first ask if they should. Many of these countries need to reorient their economies from exports to domestic demand. A higher currency helps. And if it’s happening too quickly, they can use macroprudential regulation at home....
One thing other countries should not do is ask America to leave unused one of the few effective policy tools it has left to stimulate the domestic economy. The world needs higher unemployment and deflation in America like a hole in the head.
Indeed. If there was one big lesson from 2008-2009, it is that the rest of the world has an even greater interest in full employment in America than America does.
