Dangerous dollar floodThe U.S. Federal Reserve announced that it will go into a second round of quantitative easing by printing $600 billion to buy back bonds, a monetary alternative when interest rate policy no longer works to stimulate the economy. The U.S. central bank took a drastic turn to avoid a double dip, or prolonged recession, in the economy with unemployment stubbornly sky-high. The state of the U.S. economy is that perilous.
The Obama administration and Democrats endured a landslide defeat in this week’s midterm elections. They can no longer depend on congressional support to seek increases in fiscal spending. The Federal Reserve is therefore on its own. A third and fourth quantitative easing may be on the horizon. The dollar-printing monetary policy, despite its inevitability, cannot assure results. It remains unclear whether more liquidity will actually send borrowing rates lower, spurring corporate and consumer spending.
An aggressive monetary policy by the reserve currency country might spell trouble for the world economy. Strife among nations over currency rates can get worse. The quantitative easing will weaken the dollar. The European Union and Japan are already hinting at currency intervention to stem rises in their currencies against the dollar. The Chinese central bank attacked the U.S. policy as the biggest threat to the world economy. The stopgap Gyeongju peace treaty on currency devaluations by the Group of 20 finance ministers and central bank governors may go down the drain.
International oil and gold prices are jumping. Dollars poured into emerging markets when the first easing took place in 2008. That is likely to repeat itself, inflating assets and equities.
Korea must brace up for a tsunami of capital seeking higher returns. The won will shoot up, taking a toll on export price competitiveness and the current-account balance. Inflationary pressure is another worry.
The central bank will have to consider another rate hike if prices of imports rise and consumer prices shoot up. We have learned in the past how dangerous a market drowning in too many dollars can be.
The only way to combat a tsunami is to build a strong fort. The G-20 Summit in Seoul next week will be a start. As the host, Korea must mediate an international agreement to prevent a global currency war. Monetary authorities must be on full alert. Finance Minister Yoon Jeung-hyun said all options are on the table to address the dangers resulting from the U.S. move. The times call for real action.