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Paul Krugman recently discussed the charge that QE2 is stoking inflation in the developing world:

Oh, and what about Ben Bernanke? Well, to the extent that emerging markets are insisting on a fixed exchange rate against the dollar in the face of obvious overvaluation, that contributes to the boom and hence to demand. But I don’t think it’s reasonable to demand that the Fed stop fighting US unemployment in order to keep Chinese currency manipulation from leading to cotton hoarding by Chinese farmers.

He’s right, all the Chinese would have to do is raise the value of the yuan. You might argue that this would slow their economy. But if inflation is shooting upward they need to slow the (nominal) economy.

For China to blame the US for its inflation, when they refused to cut back on the number of Treasury bonds they bought as a way of tightening monetary policy and boosting the yuan, would be like the US blaming China for high unemployment, when we refused to buy more Treasury bonds to weaken the dollar and boost the prices of commodities, stocks, TIPS and foreign currencies. Bernanke and company showed in November that they are quite capable of taking affirmative steps to solve our own problems (although I’d like to see even bigger steps.) Now China needs to show the same can-do spirit, and stop blaming foreigners for its problems.

BTW, it’s good to see Krugman talking about how the Fed is “fighting unemployment.” A clear message to all those old Keynesians who whine that there is nothing monetary policy can do once rates hit zero. Their hero FDR didn’t whine that there was nothing he could do about deflation because rates were at zero. He engaged in level targeting—set a goal of getting prices back up to 1926 levels. And he got prices rising fast.

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This entry was posted on January 29th, 2011 and is filed under China, Exchange Rates, Misc., Monetary Policy, Praising Krugman, Quantitative Easing. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response or Trackback from your own site.



