DSK on QE2

IMF Managing Director Dominique Strauss-Kahn gave an interesting interview to Stern magazine.  The transcript on the IMF website seems more comprehensive than the story based on the interview in Stern.   DSK covered a lot of ground but his comments on the US Fed quantitative easing were especially interesting.  In addition to offering the standard pro-QE2 position that what’s good for the US economy is good for the world, he had this exchange —

Stern: Does the rest of the world have to pay for the fact that the United States have been living on credit for so many years?
Strauss-Kahn: That’s right. But the United States were the dominant economy for decades. They also used the dollar as a political instrument. We all know the expression, “the dollar is our currency and your problem”.
Stern: Nixon’s Treasury Secretary John Connally made that statement when he tried to get other countries to share the cost of the Vietnam War.
Strauss-Kahn: Yes, and that has not changed in the past three years of the crisis. The United States have a dominant position, still.
Stern: And can thus use the money-printing press as the ultimate weapon?
Strauss-Kahn: Well, after all, even in the crisis, which as we know started in the United States, the dollar has remained strong. Why? Apparently the dollar still is the most important reserve currency, and the currency people trust in the end.

This was by way of DSK disputing the claim that QE2 would trigger a “currency war”.   Indeed, his argument is very different from the pessimistic view that the purpose of QE2 is to trigger a competitive depreciation of the dollar.  Instead, it’s a combination of the claim that (1) since the dollar is a reserve currency, QE2 will trigger a global monetary expansion as other countries hold more dollars and (2) the US is forced into something like QE2 because the demand for dollars as reserves increases the demand — and thus the value — of the dollar beyond what economic conditions alone would dictate.

So in the world he’s looking at, the idea that the US is out to create US-only inflation or an unfairly depreciated currency is far off the mark.  It’s more like in the old days of the gold standard where policymakers could have found a way to add more gold during crises.  Thus if the rest of the world doesn’t like QE2, they could always set out to create an alternative reserve currency to rival the dollar.  Unfortunately, as the Irish crisis shows, the leading alternative is currently preoccupied with self-preservation rather than expansion.

3 thoughts on “DSK on QE2

  1. Having reserve currency status confers powers not beholden to other countries: living beyond one’s means in the long-run; successfully maintaining a relatively closed economy in an increasingly globalized world; the irrelevance of PPP given that companies will always favourably price to market –the market being America’s profligate consuming class of 300 million; and, lest we forget, the ability to ‘do as I say, not as I do.’ It is ironic that China’s mercantilism is now being attacked whilst the global corporations that made it possible –and that made China the world’s factory– are themselves hoarding cash and doing nothing to boost global growth.

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  3. Most importantly, DSK says: “Well, after all, even in the crisis, which as we know started in the United States, the dollar has remained strong. Why? Apparently the dollar still is the most important reserve currency, and the currency people trust in the end.” ….I don’t have much time for DSK or the IMF(ditto OECD) but I think this is an important comment, most especially the use of the word Trust – well that is a pretty fickle thing, isn’t it when it comes to money and markets?. Its also a lot to do with seeking comfort in the past. But its clear things are changing fast now, and as dollar hegemony goes, another ten years down the road , maybe even much less, it will be very different, the trust DSK highlights is in decline, will continue to do so, and is irreversible imho. When at some point Bernanke has to mop up all the liquiduity and finds he cant, the trouble will really begin. As for DSK’s suggestion (admittedly) US QE2 aint much to do with dollar…someone outght to tell DSK to either/and/or a) stop insulting peoples intelligence b) fire his advisers and get a new lot in who really know what is going on

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