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Quantitative Easing Is Just Devaluation

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As the Federal Reserve Board gets ready for yet another round of quantitative easing (i.e. printing more money), one may well ask: why? If previous quantitative easing hasn't spurred domestic spending, why does the Fed believe that more of the same will suddenly produce results?

It's not domestic spending that the Fed really hopes to stimulate by printing more money, but, rather, exports. While the Fed's zero interest rate policy has yet to lever much in the way of a domestic spending rebound, no one can doubt its ability to drop the value of its currency.

With the US Treasury depleted and interest rates already at zero, that's about all that's left in the policy tool kit. Lurking behind the Fed's official concerns for deflation lies its real agenda--the old standby, the "beggar thy neighbor" policy of trying to export your unemployment to your trading partners via a falling currency.

And no one can say it isn't working. The greenback has already fallen to a 15-year low against the yen. It's down over 20 per cent against the euro, while the junior dollars of Canada and Australia have rallied to within parity.

Most of all, the greenback has fallen against gold, which is now a hair's breadth from its all-time high. That's because, unlike fiat currencies, bullion has no central bank to push back against the Fed's devaluation efforts. Nor does gold have an export sector with millions of high-paid manufacturing jobs to protect. Gold is a currency with no economy to support, which makes it an ideal candidate as the other side of the US dollar trade.

But the same reasons that make gold an obvious reciprocal of a falling US dollar make it equally unsuitable as a source of stimulus to the US economy. It's not against gold that the Fed seeks devaluation. It's against the yuan, the yen, the euro, the Canadian dollar and the currencies of America's other trading partners that the Fed hopes to gain some traction with job creation and economic growth.

If an already anemic recovery has spurred devaluation, consider how much more compelling that policy will be when Congress finally gets serious about reining in a record $1.3 trillion federal budget deficit.

If you think the economy needs help now, just wait until you see what it needs when yesterday's bailouts become tomorrow's spending cutbacks. It's not zero interest rates but a euro/dollar exchange rate of 1.65 or a dollar/yen rate of 70 that are the real targets the Fed has in mind. And if it keeps its printing presses running, that's exactly where the greenback will be headed.

It's understandable that a country with nearly a ten per cent jobless rate and a budget deficit roughly a matching proportion of its GDP should want to export its unemployment abroad. What's puzzling is why the rest of the world still wants to hold its money as a reserve currency.