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Changes to US domestic monetary policy creates international tension

December 2, 2010

I am really bothered by all of this news about Germany and China freaking out about our domestic monetary policy.

For those of you who are unaware of what is going on, basically, the Fed decided to invest $600 billion into the U.S. economy which is known as expansionary monetary policy. Since you most likely are not an expert in economics—neither am I for that matter—expansionary monetary policy is the Federal Reserve purchasing U.S. debt which is more commonly known as printing money. The effect of this is a greater supply of money which creates a downward pressure on the dollar’s value.

What this does for our economy is actually beneficial in our current situation. The U.S. is currently facing two problems: we have high unemployment and a large deficit. This improves both because as the dollar loses value our exports will be relatively cheaper. This has the same effect on domestic purchasing because products produced in the United States will also be relatively cheaper than those abroad, thus creating further incentives for people to buy American. 

It is really surprising that there would be any domestic debate over this because more people buying American, or at least goods produced in America, creates more jobs, which we really need right now. This also does much to improve our trade balance which, as you probably could imagine, is quite unbalanced. Of course, as many nations have found out, this is no miracle cure. There are two draw backs.

The first drawback is, if pursued too aggressively, expansionary monetary policy can lead to out of control inflation. Think wheelbarrows of money to buy a loaf of bread. This scenario is it is extremely unlikely. The dollar is the most popular, most pervasive form of currency in the world, with countries even forgoing their own currency to adopt the dollar. The United States Treasury produced more than $219 billion in currency last year; almost $21 billion replaced currency taken out of circulation. You expect me to believe that another $600 billion is going to lead to the general collapse of our entire financial system? Not likely.

The second drawback is foreign policy related. The more the United States pursues this policy, the angrier export orientated countries such as China and Germany become. Frankly, I have a hard time caring. China is notorious for manipulating their currency and China and Germany both are dependent on American consumers to purchase their products. I fail to see how Germany expects unemployed American consumers to purchase a Jetta.

Why in the world are people criticizing the Federal Reserve for undertaking policies that make basic economic sense? Moreover, why are people making this into a political issue? The Federal Reserve is a non-political entity. Its members are not elected, they are appointed. Finally, Federal Reserve Chairman Ben Bernanke was a Bush appointee and an exceptionally qualified one at that, making any reflection of his policies on Obama absolutely ridiculous.

Jason Larson is a student at the University of Wisconsin-River Falls.