It is almost ludicrous, to me, that United States monetary policy is being criticized as being "selfish" and that "international monetary co-operation has broken down."
If anything, in my mind, United States monetary policy over the past four years or so has been excessively easy and that the decision of policy makers has been to err on the side of being too easing.
Yet, the tension between some emerging market (EM) countries and the developed world has risen on the eve of the G20 meeting that will take place in Sydney, Australia.
The attacks on US economic policy remind one of the attacks in the European Union on the economic stance of Germany. The only difference is that Germany has been the example of a more prudent fiscal and monetary stance, whereas the United States doesn't even come close to fulfilling that role.
Still, the United States and the Federal Reserve System are under fire.
Therefore, it was refreshing to hear that George Osborne, Britain's finance minister, told "emerging nations to fix own faults."
Mr. Osborne is quoted as saying "Emerging market countries should not blame western monetary policy for their problems but focus instead on fixing their own faults."
He continued, "the Fed's asset purchase tapering may have triggered the emerging market sell-off, but the root cause was 'domestic fragility' in some of those countries. This is why others-such as Mexico, Peru, and Malaysia-had come out relatively unscathed."
Mr. Osborne's remarks followed the footsteps of comments by Joe Hockey, Australia's finance minister who said "emerging markets would have to wean themselves off the 'morphine' of easy money." This, of course, makes reference to how these EM countries behaved during the time that the Federal Reserve System was flooding the world with liquidity.
Osborne further said "both developed and developing countries should focus on making their economies more resilient. This meant putting in place 'responsible' fiscal policy, credible institutions, effective financial regulation, and long-term structural reforms.
Mr. Hockey agreed. He argued "emerging markets getting their economic houses in order" was a high priority.
However, "that is no small order. For many emerging markets, the changes needed to bolster their economies and make them more competitive are politically very tough, especially with a number of nations facing election years."
A further shove in this direction came from the International Monetary Fund (IMF). One of the countries complaining about the "tapering" program of Federal Reserve purchases has been India.
A scheduled assessment of India by the IMF "highlights the challenges facing the new government that will emerge from a general election to be held in the next three months."
More specifically, the IMF reported that "The Indian economy, with growth set to fall to its lowest annual level in a decade is vulnerable to the withdrawal of global liquidity and India's own shortcomings."
India's shortcomings have not only resulted in economic growth that was the "lowest annual level in a decade" but in "elevated inflation", a situation "unusual among emerging markets."
Janet Yellen, Chairwoman of the Board of Governors of the Federal Reserve System, seems to see no necessity of responding to the cries of these EM countries. In testimony before Congress this past week, Ms. Yellen made it clear "that monetary policy will depend on economic conditions in America alone."
Of course, Ms. Yellen was testifying to members of the organization responsible for giving the Fed its two guiding objectives…low levels of unemployment and low rates of inflation. She would have received a much less warm reception from the members of congress if she had reported otherwise.
This whole situation, however, points up something that is very important in economic analysis but often gets brushed aside when dealing with the consequences of earlier economic actions. The full effects of policy actions taken by governments and by central banks do not impact the economy immediately or within a relatively short period of time. There are lags in the effects of economic policy.
As a consequence of this, very often the positive effects of a given policy action may impact over the shorter-term some parts of the economy that have very substantial political benefits. Unfortunately, the not-so-good effects often take a longer time to arise. The result is that many people impacted by these policies have a hard time relating the longer-term effects of the governmental actions to the governmental actions, themselves.
For example, economists talk about the lag-in-effect of monetary policy. An expansionary monetary policy may, in the short-run, lower the unemployment rate in an economy. In the longer-run, the expansionary monetary policy may end up causing a lot of inflation. The citizens of this country may find it hard to look back in time and blame the earlier expansionary monetary policy for the current high levels of inflation. The lower unemployment rate was good at the time but it becomes forgotten in the present when monetary policy must be tightened in order to slow down the rapid inflation. Generally, politicians will try and place the blame elsewhere so that they don't have to advocate the tighter monetary policy that is needed to reduce the rise in prices.
So, we have EM countries that benefited from all the liquidity that the Federal Reserve System pumped into the world economy in the past four years or so. Some emerging market countries, as Mr. Osborne stated, "lived" off the "morphine" of easy money. Now the times have changed.
Now, the United States, for the health of its own economy, must attempt to return the Fed's monetary policy to a more "normal" position within the economy. Those that call this effort "selfish" or claim that such actions are contribution to the break-down of "international monetary co-operation" need to look into "their own economic houses."
Just because they failed to act with discipline during an earlier time does not mean that the United States now needs to forego discipline now because of the past actions of these EM nations.
In conclusion let me just add that if the United States does not take care of getting its economic house in order, the world will eventually be faced with trying to live in an era of global inflation, something that would be hugely disruptive to an integrated world economy.