International deiplomacy is usually conducted — with the exception of U.N. grandstanding — on a very polite level, with tough talk reserved for closed-door meetings. This makes the international response to the Fed’s $600-billion purchase of U.S. Treasury notes (QE2) exceptional for its frank criticism of the move.
Germany’s Spiegel magazine interviewed that nation’s Finance Minister, Wolfgang Schauble, and got some pretty blunt responses, such as this one [my emphasis]:
The German export successes are not the result of some sort of currency manipulation, but of the increased competitiveness of companies. The American growth model, on the other hand, is in a deep crisis. The United States lived on borrowed money for too long, inflating its financial sector unnecessarily and neglecting its small and mid-sized industrial companies. There are many reasons for America’s problems, but they don’t include German export surpluses.
How can anyone disagree with this viewpoint? Yet the current administration, and Bernanke’s Federal Reserve, think they’re doing the right thing by inflating the money supply (which will lead pretty quickly to domestic inflation and price increases for gasoline and other imported goods — in other words, nearly everything we consume).
Below are several more Spiegel questions, followed by Schauble’s replies (with my emphasis).
SPIEGEL: Last week, the US Federal Reserve Bank decided to flood the economy with $600 billion in new money ["QE2"]. Will this stimulate the economy as hoped?
Schäuble: I seriously doubt that it makes sense to pump unlimited amounts of money into the markets. There is no lack of liquidity in the US economy [from previous transfers of cash to financial institutions], which is why I don’t recognize the economic argument behind this measure.
SPIEGEL: The US wants to depress the value of the dollar in this way, so that it can sell its products abroad more easily. In light of the ailing US economy, isn’t that a completely reasonable strategy?
Schäuble: No. The Fed’s decisions bring more uncertainty to the global economy. They make it more difficult to achieve a reasonable balance between industrialized and emerging economies, and they undermine the US’s credibility when it comes to fiscal policy. It’s inconsistent for the Americans to accuse the Chinese of manipulating exchange rates and then to artificially depress the dollar exchange rate by printing money.
It’s embarrassing to hear the truth from foreigners, especially when it’s obvious Schauble could say much more but is attempting to retain at least a veneer of diplomatic grace.