By Philip Zelikow
To achieve a better G-20 summit agenda for next month, policymakers need to answer this question:
Are the leading countries coordinating their monetary moves?
I include China as a leading country. It is a principal creditor to the world and is entitled to be heard. So what does it mean when Wen Jiabao issues an extraordinary warning shot to the United States to preserve the value of the dollar. Then, a week later, Bernanke and the Fed answer him promptly with loud deeds: a huge quantitative easing (printing money to buy Treasuries and other securities) that has already reduced the value of the dollar nearly 5 percent, just in the last 72 hours.
Question #1: It would be interesting to learn when and how did we explain this move to the Chinese government? Or at least be reassured that we handled this seemingly scornful response in an appropriate way.
Question #2: As both we and the Eurozone engage in this aggressive injection of liquidity, what is the underlying analysis about the danger of competitive devaluations and inflation?
Sure, we all know that some inflation will be a good counter to expected deflation. But, after the price declines of late 2008, the seasonally-adjusted Consumer Price Index has now gone up in both January and February even though unemployment has also been shooting up.
It has long been evident that the Fed would probably have to employ some quantitative easing for at least the reason of helping to keep the price (interest rates) down in the huge coming U.S. debt auctions and also to keep from swamping the rest of the world's need for capital. But why did the Fed move so fast, so soon -- which may constrain its freedom of action later? Does it see something the rest of us don't?
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