Global Inflation and the Fed: One More Time

George Melloan is unhappy with U.S. monetary policy, and he repeats what has become by some a criticism of Federal Reserve policy:

“In accounts of the political unrest sweeping through the Middle East, one factor, inflation, deserves more attention…

“Probably few of the protesters in the streets connect their economic travail to Washington. But central bankers do. They complain, most recently at last week’s G-20 meeting in Paris, that the U.S. is exporting inflation…

“About the only one failing to acknowledge a problem seems to be the man most responsible, Federal Reserve Chairman Ben Bernanke. In a recent question-and-answer session at the National Press Club in Washington, the chairman said it was ‘unfair’ to accuse the Fed of exporting inflation. Other nations, he said, have the same tools the Fed has for controlling inflation.

“Well, not quite.”

I would simply repeat my argument from our previous macroblog post, but I don’t really have to. Mr. Melloan makes the point for me [with my emphasis added in italics]:

“Consider, for example, that much of world trade, particularly in basic commodities like food grains and oil, is denominated in U.S. dollars. When the Fed floods the world with dollars, the dollar price of commodities goes up, and this affects market prices generally, particularly in poor countries that are heavily import-dependent. Export-dependent nations like China try to maintain exchange-rate stability by inflating their own currencies to buy up dollars.”

If the United States unwisely floods the world with dollars, driving down the international value of the dollar, countries with flexible exchange rates would see the value of their currencies rise—making food grains and oils denominated in dollars more affordable, not less. The only way inflation gets exported to these other countries is if they attempt to maintain the values of their currencies below the levels that markets would otherwise take them. That inflation is purely homegrown.

That point is also exactly the one I made last time with respect to Chinese inflation:

“To keep the nominal exchange rate from rising, the People’s Bank of China in effect prints yuan and buys dollars. Though this has limited impact on any real fundamentals, it is the source material for inflation.”

I did, however, leave one unfinished piece of business in the previous blog post:

“Of course, the astute and skeptical among you might ask, if the money-to-inflation nexus is relevant to China, why not the United States? A fair question, one that I will take on another day.”

Well, it’s another day, so here we go. In China, increases in the monetary base—the stuff that the central bank directly creates—translate pretty directly into broader measures of money held (and spent) by the public, as illustrated by the relative stability of the so-called M1 and M2 multipliers:

6a00d8341c834f53ef014e864b791a970d-400wi
6a00d8341c834f53ef014e5f713b82970c-400wi

Admittedly, the collapse in the M2 multiplier in the United States—which has, for practical purposes neutralized the inflationary impact of the increase in the Fed’s balance sheet—may not last forever. If it reverses, I for one will read this again.


Originally published at macroblog and reproduced here with permission.

2 Responses to "Global Inflation and the Fed: One More Time"

  1. Guest   February 25, 2011 at 3:25 pm

    nothing for the hot money inflows? the world will survive fed’s stupidity. but the system of pseudo-banks and the sociopats who pretend to run them will not. it is the end of the neo-liberal ideology. it is the end of the pseudo-elites who forgot who they are. and yes US had been exporting inflation not only for the past two-three years, but for the last three-four decades. the endless Greenspan-style push to inflate the price of assets so the indoctrinated in the free-market ideology “elites” can pretend they are doing something of value has a price. the world had been paying that price for decades. and you guys in the states stop talking nonsense to all these people and try to realise that more you pretend not to bear responsibility for the financial disaster, less willing everybody else are to take into account your opinion. It is over. Face it. The Washington consensus had failed. You caused so much damage to billions of people. Nobody did force you to push your economy in this direction. You forced many others. Stop playing god-chosen leader of the world and learn to control and lead yourself first. By You I don’t imply the us population collectively as a group, I am pretty well aware different groups and people bear the biggest share of idiocy, the same guys /mostly/ who are jumping around with deadly military toys playing the big boss. take care for the morons in your institutions, scrap the fake doctrines and “studies”, get rid of the organisations full with “scientist” who’s only purpose is to “prove” to those unwilling to by the ideology that everything will be fine if they just let you execute The Plan. You are very bad planners.. and analysts. and I do say this as a result after examining your decision-making approaches, your psycho-models and the kind of people you are pushing in organisations and governments around the world. I want meritocracy. I am fed-up of sharp elbows, narcissism, egoism, egotism, arrogance, ignorance and pure stupidity. if you just see what a guy I have for financial minister in my country you will get the story. enough of wankers. it is time for serious thinking and behaviour. I do understand these folks believe they are perfectly suitable for the job but this is not the case. they are selected to comply the dogma, the ideology, the doctrine. more you wait for them to figure out how to handle the situation, less time to react you will have. sooner or later even the dollar reserves stalemate will not be enough as a parity.

  2. Gaurav Verlekar   March 1, 2011 at 6:24 am

    Well In such a case, it is true that countries with flexible currency rates will not face inflation as their currencies will appreciate, bringing down the price of commodities.But, To a certain extent it is also true that free dollar is one of the main why commodities prices are artificially alleviated. In such a scenario it does seem that the rise in the price of commodities far outweigh the gain of currency appreciation.