Fighting the Fed

IBDEditorials.com

Monetary Policy: An unlikely assortment of people ranging from Sarah Palin and Paul Volcker to Rep. Paul Ryan and World Bank head Robert Zoellick all believe quantitative easing is a big mistake. So do we.

The discontent has also gone global. The governments of China, Brazil, Japan, Germany and Russia continue to express concern that the Fed's money printing will distort the world economy and lead to a trade war.

Will it? Since the first round of quantitative easing that ended in March — during which the Fed printed $1.7 trillion in new money — there's no question new economic stresses have emerged between the U.S. and its key trading partners.

Domestically, economic growth has slowed, and we've actually killed more jobs than we've created. Even so, oil has doubled to nearly $90 a barrel, key commodities have soared to record highs and gold has surged past $1,400 — all bad inflation omens.

Now, the Fed is embarking on a second round, dubbed QE2, in which it will spend another $600 billion and maybe more. But don't expect it to be any more effective than the first round.

After years of listening to American lectures on laissez-faire, other nations see all this money printing as a transparent attempt at weakening the dollar to boost exports at their expense. It's a strategy that risks trade retaliation and currency wars.

We may be seeing that right now. Witness China's move Tuesday to impose capital controls and the ominous talk from other nations about "protecting" markets. Criticisms are becoming strident.

"The American growth model ... is in a deep crisis," German Finance Minister Wolfgang Schaeuble said in highly critical comments to Der Spiegel. "I seriously doubt that it makes sense to pump unlimited amounts of money into the markets."

We don't often agree with other nations' criticisms of us, but this time they may be right. They worry the cheaper dollar will not only hurt their exports, but will also push up inflation by making anything they buy with dollars — oil is but one example — more costly.

As serious as those issues are, the impact on the U.S. economy is of far greater concern. The Fed has taken a page from the Obama administration's failed hyper-Keynesianism, believing it can refloat the flagging U.S. economy on a sea of newly-printed money.

It can't. Economists have agreed for years that no nation can devalue its way to prosperity. The Fed seems oblivious that its creation of all this new money risks major trouble in our economy — perhaps another market bubble, or broad-based inflation, or a global trade war that drags down the world's economy. Something.

"It's a big mistake, in my opinion," said Rep. Ryan. "We have Congress doing tax and spend, borrow and spend. Now we have this Federal Reserve doing print and spend."

Even some on the Fed board are having qualms. As economist Ed Yardeni notes, a handful of monetary hawks who dislike the Fed's current policies will rotate onto the Fed's policy committee early next year. And at least two on the Fed's policy making panel who voted for QE2 now express doubts.

Small wonder. QE2 will not only saddle us with higher debts, it will lead to more market volatility, higher inflation and, eventually, slower economic growth and lower standards of living for all.

Thanks to the midterm elections, the worst excesses of Congress' tax-and-spend fiscal policies will likely end soon. Unfortunately, we may have to wait until early next year to stop the Fed from making things worse.