Even without the pending November elections, political pressure to rev up the economy would be understandable: Unemployment, still about 9.6 percent, remains intolerably high in a period of low inflation; wages are sliding backward in terms of constant dollar values; growth has slowed to a 1.7 percent annual rate, which isn’t enough even to absorb new workers coming into the job market, let alone bring down high unemployment; and chastened consumers are focused more on working down the record-high household debt they built up over the past two decades than on spending to boost the economy.
But never mind. Republicans, having wrongly convinced many Americans that doing nothing is preferable to additional stimulus measures, are willing to filibuster and thwart any measure by the Obama administration to bolster the economy. So absent a sensible fiscal policy in the wake of the Great Recession – now statistically confirmed as the worst since the Great Depression of the 1930s – the Federal Reserve seems poised to try a new round of monetary policy initiatives.
Fed board members have all but confirmed in recent weeks that they will resume the debt-buying strategy known as “quantitative easing” in November. Their presumed intention is to buy up to $1 trillion in Treasury notes to keep interest rates down and help lubricate the economy’s path out of the doldrums.
That would be helpful, but it does have some drawbacks. Primarily, it is widely seen abroad as a de facto devaluation of the dollar. And like it or not, that’s making international ripples that could prove painful on several fronts.
The dollar has already dropped significantly in currency exchanges over the past several months in anticipation of the Fed’s strategy. It’s dipped from $1.20 per euro, the common European currency, to $1.40, and it’s fallen to a 15-year low against the Japanese yen. At the same time, however, it hasn’t done anything to force a resistant China into revaluing its grossly undervalued renminbi, one of Washington’s main goals to help ease America’s vast trade imbalance with China. Instead, China just continues to peg its yuan to the dollar.