The nerve-racking fear for a global currency war determined most part of the second half of 2010. In his outlook on 2011 bravenewlook stated, that this topic is not covered extensively anymore, but is still very much there. Following up on his short outlook for 2011 on this particular topic I will describe how the $600 billion bond program could backfire on the current economic Situation in the US. Referring to this, I will discuss how critical the situation between China and the US currently is.
The extremely low interest rate and the two rounds of so called Quantitative Easing were both put in place by the FED in 2010 as measures to enhance the US economy. The ideal being, that growth in the economy will not only help easing the situation for US companies but also reduce the unemployment rate, which rose to 9.8 Percent by end of 2010.
In the article “US economic outlook 2011” the International Business Times reports a growth rate of around 3 percent for the US economy in 2010 and forecasts a growth rate of 3.5 to 4 percent in 2011. According to their forecast, this growth rate will result in a decline of the unemployment rate to about 9 percent. But it still may take 3 – 4 years for the unemployment rate to fall to acceptable levels.
How unreliable those forecasts are is shown by yesterdays report by Bloomberg: Already the Jobless Claims rose higher than expected in the first week of 2011 to 445,000 as fewer jobs as forecast were added in the US.
For an easing job market the US economy needs to accelerate further, which might lead to a long term low of the interest rate. But, if the FED does not hike up the interest rates they might risk “unleashing inflation” as stated in the article “Fed Official: $600 Billion Bond Program Could Backfire” by the Huffington Post. Charles Plosser argues, that the near zero interest rate as well as the huge Bond Program could lead to an inflation which would outweigh any benefits of those programs to the economy.
Another big problem, the US is currently facing was announced by Mr. Geithner himself (ftd, 07/01/2011): The US is slowly but steadily reaching its own debt limit of $14.3 billion, which, according to Geithner, would lead to the bankruptcy of the United States of America.
A very interesting aspect concerning this is the fact, that the biggest creditor of the US is China. In his Blog “The informed observer” Peter Cohan states, that China is currently holding US debt securities worth $ 906.8 billion which helps financing the very low interest rate in the US and its budget deficit of around $ 1 trillion. Being very dependent on China due to this fact, the US could easily be pressurized.
The different problems of the United States, are all very much connected with each other and influence their entire economic situation. Although their economy seems to recover they should start thinking about the impact such cheap money and its ensuing deficit will have on their economy in the long run.
And any solutions to their current situation should not include any accusations to China, as no other country other than the US should be made responsible for their own situation.