Zuo Xiaolei: US Dollar Flooding Will Trigger Global Economic Risks

Devaluation and debt reduction will curb the export of immoral capital from other countries to excessive emerging markets.

In November 3rd, the US Federal Reserve launched the second round of quantitative easing monetary policy with a total amount of US $600 billion. This move has been severely criticized by the international community.

It is widely believed that the unfair trade competitiveness of American enterprises will be met by retaliatory measures in the trade area.

Not only can this approach not boost the US economy, it will also lead to the influx of hot money into emerging market countries, triggering new global economic risks.

In this regard, we interviewed chief economist of Galaxy Securities.

US dollar into global instability

Q: what harm will the second round of quantitative easing monetary policy of the Federal Reserve impose on the global economy?

Zuo Xiaolei: this approach has made the world know two questions: the US dollar is the biggest global instability factor. We must restrain and change the US dollar based international monetary system.

Within a week after the announcement of the new round of quantitative easing monetary policy in the United States, the euro appreciated by more than 3%, the pound appreciated by nearly 2%, and the yen appreciated nearly 1%.

Global stock markets rose, the Dow rose more than 3%, and the British, German and French stock markets rose by more than 6%, 5% and 7% respectively.

Oil prices hit $90 a barrel, and gold prices exceeded 1 ounces of $1400.

The unbridled large-scale issuance of the US dollar accelerated the capital inflow in the emerging market and pushed the rapid appreciation of the local currency into a high risk area of asset price bubbles and inflation.

In the third quarter, the amount of money flowing into Southeast Asian countries and the Korean stock market was 5 times that of the second quarter.

In particular, the Fed's quantitative easing monetary policy is implemented through the purchase of treasury bonds.

The purchase of treasury bonds is the two level market paction in the securities market. It is the injection of money into financial institutions and has no direct effect on improving the real economy.

Because the unemployment rate remains high, the real estate market is sluggish, and the new economic growth point is uncertain. How can the banks of the United States have the power to provide credit to the real economy? The fact is that traditional corporate credit, rolling consumer credit and real estate credit have basically not recovered.

Spamming money destroys the international monetary system

Q: now the world is worried that if this continues, will there be a third or fourth round?

Zuo Xiaolei: indeed, now all over the world take actions to intervene in exchange rate and capital controls to stabilize the value of the currency, safeguard the stability of our economy and protect our own interests.

And this clearly shows that the Fed's currency spoil the dollar based international monetary system.

The currencies of the countries are basically anchored in dollars.

However, the US dollar spamming caused global liquidity, which made capital inflows to promote the appreciation of the currencies of the countries around the world, and aroused the worry that emerging market countries might form asset price bubbles and inflation worsening, which greatly disturbed the normal order of exchange rate, trade and commodity markets in the world, and created the great instability of global economic trade. Countries had to use various tools and even implement capital controls to intervene in exchange rates.

This means that countries are no longer anchored by the dollar, but rather anchored by their respective exchange rate targets.

Of course, the position of the US dollar as anchor is only a great challenge, and it has not fundamentally shaken its status. But if the US dollar does not immediately return to its position and restore the function and function of the anchor, it will be the beginning of the disintegration of the US dollar based international monetary system.

In the medium and long term, countries should seek relatively stable currencies as the currency for clearing and settling international trade, or form bilateral monetary options settled in imported currencies, which is also a more equitable way.

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Sacrifice other countries' interests for their purpose

Q: some people have evaluated this policy as a "beggar thy neighbour policy". What do you think?

Zuo Xiaolei: the United States has been developing in debt.

Especially after the crisis, the deficit has increased sharply to a record high.

The risk and unsustainability of this debt growth model has been very prominent. It is imperative for the us to change its way of debt growth.

But this pformation is cost effective.

A large proportion of US dollar treasury bonds are held by foreign countries, while the depreciation of the US dollar directly reduces debt, which makes foreign holders suffer huge losses.

The trade deficit is one of the forms of liabilities formed by excessive consumption in the United States. The trade deficit is actually a way of increasing consumption by borrowing money from foreign countries.

Through the depreciation of the US dollar, the export of other countries is suppressed, and the overdraft consumption of Americans is forced to be reduced. Instead of encouraging the pformation of private debt consumption patterns by encouraging savings and investment, the result is inflation, asset price bubbles and even the financial crisis, especially in emerging market countries.

It is very immoral to sacrifice the interests of other countries to achieve their goals.

Therefore, Webb Balard, an official of the Ministry of industry and foreign trade of Brazil, said that the Fed will "deprive their neighbors of extreme poverty, which is a deprivation of the surrounding countries and ultimately leads to retaliatory measures".

Great damage to national economies

Q: what are the negative effects of this policy on world economic and trade?

Zuo Xiaolei: in view of the devastating impact of the new quantitative easing monetary policy and the devaluation of the US dollar on the economies of various countries, the central banks in Japan, the United Kingdom and Europe have announced the expansion of the scale of asset purchases. The scale of their easing is constant and interest rates remain unchanged. This can be interpreted as following the loose monetary policy of the Federal Reserve, or as an exchange rate intervention against Japanese yen, sterling and euro appreciation against the US dollar (1.3327, -0.0028, -0.21%).

Central banks in emerging markets are also intervening in foreign exchange markets. Officials in Brazil, South Korea and Southeast Asia have threatened to take more measures to stop surging capital. Brazil and Thailand have launched capital controls to impose taxes on foreign speculative capital.

South Korea's Ministry of Finance said it would consider ways to limit capital inflows.

The Central Bank of Thailand is in close consultation with other Central Asian banks and is preparing to introduce measures to prevent excessive speculation.

The International Monetary Fund (IMF) is the most authoritative institution in the global exchange rate policy, and has always strongly advocated the floating exchange rate formation mechanism.

Blanchard, chief economist, recently said that the second round of quantitative easing measures launched by the Federal Reserve would reduce the risk of interest rate trading and make more capital flow into emerging markets. "If capital inflows are excessive, countries will have reason to control capital."

Germany, France and emerging market governments questioned the United States at the G20 summit.

The president of the world bank also recently proposed the idea of returning to the "gold standard".

Although this is not a particularly pragmatic and operable proposal, it shows the strong demand of the international community for reforming the international monetary system.