On November 15, while discussing the possible effects of QE2, I wrote:
The effect upon the dollar can't help much. It will either be temporary or disastrous, depending upon what foreign central banks do:
- Temporary Effect. If foreign central banks buy dollars with their currencies to prop up the dollar, as most Asian central banks are already doing so that their own products will be more competitive, they will drive the dollar back up, eliminating the positive effect upon America's trade balance.
- Disastrous Effect. If foreign central banks don't buy dollars, then the dollar will collapse, producing a severe cut in American living standards. The United States would experience inflation. Interest rates would skyrocket. The prices of foreign goods, including oil, would skyrocket.
The effect was temporary. The central banks of Asia's largest economies are stepping up their exchange rate manipulations. Bloomberg reports:
Japan sold yen today, causing the currency to weaken more than 4% against the dollar after rising 5% last month. "Ongoing one-sided moves" would hurt the recovery from a March earthquake, Finance Minister Yoshihiko Noda said....
The [dollar's] drop last year left all of Asia's 10 biggest economies seeking to influence their own exchange rates to aid exporters and growth.
These central banks buy dollars in foreign exchange markets in order to drive down the exchange rate of their currencies relative to the dollar so that they get manufacturing investment and gain our industries while we stagnate and lose our industries.
Bernanke tried to reverse this with QE2, which caused the U.S. inflation rate to rise from about 1% to about 3.5%. QE3 would probably raise U.S. inflation to 5% or 6%.
Although QE2 was not sustainable due to inflation, Asian currency manipulations are sustainable. They have been going on for several decades already, and will continue to work so long as the United States gives away its industries to the most aggressive currency manipulators.
The U.S. just has three alternatives: (1) continuing depression; (2) a high interest rate, high inflation dollar crash; or (3) a scaled tariff that would balance trade, help balance the U.S. federal budget, and revive U.S. manufacturing investment.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.