News that the Federal Reserve will buy more debt is good news for many American workers, but bad news for working people in the rest of the world.
During last week's meeting, the Fed said that it would buy$600 billion in Treasuries. When coupled with existing, but as yet unrealized commitments to buy other debt (MBS), then the Fed is poised to double down on US debt.
One key distinction in the new policy is the means by which the Fed plans to implement the buy. The Fed
is going to print new money and they are going to buy outstanding Treasury debt.
It would have been different if the Fed had done things differently.
I spent the weekend talking with some friends that work in FOREX at Credit Suisse and Deutche Bank.
"I love your smoked chicken," said Bill.
"I love currency volatility," said Christina.
Their take was that the Fed's plan was even more problematic for overseas stakeholders because of how it would be done. The Fed is going to print new money to make these buys. By printing new money, the Fed is stimulating inflation. They are going to weaken the value of the dollar.
- US exporters
- Anyone that owes dollars.
- Existing holders of Treasuries
- Mexicans working in America.
- People that are directly or indirectly long on commodities
- Employees in domestic US manufacturing sector
- Foreign exporters
- Sovereign Debt
- Mexicans working in Mexico.
- Foreign employees in export industrys
- Consumers of commodities
To an extent, many people wade on both sides of this fence. We all have to buy wheat, and most of us are obligated to keep on buying gasoline and heating fuel.
It is also going to help business owners that are trying to seek the attention of overseas investors. Equity in every US company is suddenly going on sale.
On the other hand, it isn't such a good time to be looking for a job in Brazil. At some point, it is going to make more sense to a Brazilian company to buy corn or cotton from the US, rather than going down the street to buy it from a local producer.
The Japanese announced plans to print more money. All of the changes related to exports are similar. The thing that makes the Fed plan more impactful is that the dollar remains the reserve currency. It is really not an option for Australia, for example, to move out of the dollar. They are going to need it to buy oil from the Saudis. They are going to need it for all varieties of trade functions.
Last week, Timothy Geithner said that the US would never use the dollar as a trade weapon. That's a nice sentiment, but it doesn't square with the Fed's actions. Geithner says he believes in a strong dollar. Even the previous administration, led by Paul O'Neill and John Snow, worked forcefully to weaken the dollar.
Obama was in India last weekend. The press photographed him dancing with children and praising the Indian workforce. Note that he is not dancing with any Indian economists. I can't imagine that Joe Sixpack, or Joe the Plumber, understands the wisdom of comparative advantage. He just hears Obama talking about how great it is when there are more jobs in Southeast Asia.
Yet the weakening of the dollar is going to hurt the Indians, not the Americans. We've been propping up our farm economy for some time. Only recently did Brazil move past its anger over American cotton subsidies. Oh, and that bill to extend unemployment benefits that passed in the summer? Another big win for every American farmer.
To the extent that Joe the Plumber is upset, there is also the question of how much support the currency play gains the favor of the left. Does Joe the Co-op Grocer feel better about dollar devaluation? I'm not sure if Obama's base will fully grasp how much this decision is going to help their interests. The middle-class gets a win here, because inflation makes it that much easier to pay your mortgage. Everyone who works for in a steel plant or in agriculture comes out on top, too. It is going to be a good time to work for an exporter of commodities. That could mean a lot of jobs for working class families. The economics are lost.