The US Federal Reserve sees the international economy’s role as a deus ex machina to rescue the US economy. Foreign countries are to serve as markets for a resurgence of U.S. industrial exports and most of all as financial markets for U.S. banks and speculators to make money at the expense of foreign central banks trying to stabilize their currencies. The way to achieve this is to depreciate the dollar.

Michael Hudson in U.S. “quantitative easing” is fracturing the Global Economy in Real-World Economics Review (no. 55) says that the Federal Reserve low interest rate policy and pumping dollars into the global economy has two unfortunate side effects for Australia – but a free lunch for foreign speculators.

First of all, high interest rates raise the cost of borrowing across the board for doing business and for consumer finances. Second – even more important for the present discussion – high rates attract foreign “hot money” as speculators borrow at low interest in the United States (or Japan, for that matter) and buy high-yielding Australian government bonds.The effect is to increase the Australian dollar’s exchange rate, which recently has achieved parity with the U.S. dollar. This upward valuation makes its industrial sector less competitive, and also squeezes profits in its mining sector. So on top of Australia’s rising raw- materials exports, its policy to counter its real estate bubble is attracting foreign financial inflows, providing a free ride for international arbitrageurs.

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Posted by: paul walter | December 20, 2010 2:00 PM