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As President Obama meets global leaders in South Korea to tackle currency and trade disputes, he will face concerns over U.S. actions that could drive down the value of the dollar and hurt the price of exports. Judy Woodruff speaks with Zanny Minton Beddoes of The Economist and Eswar Prasad of Cornell University.
And, for more, we turn to Eswar Prasad.He's a professor of trade policy at Cornell University.He's also a senior fellow at the Brookings Institution and a former economist at the International Monetary Fund.And Zanny Minton Beddoes, she's economics editor of "The Economist" magazine.
Thank you both for being with us.
ESWAR PRASAD, professor, Cornell University:My pleasure.
ZANNY MINTON BEDDOES, The Economist:
Zanny Beddoes, let me start with you.
Remind us again what the Federal Reserve was trying to do when it took this $600 billion, putting it into the economy buying bonds.What was the goal?
ZANNY MINTON BEDDOES:
Well, the Federal Reserve is trying to boost the U.S. economy.The Fed looks at the U.S. economy and sees unemployment at almost 10 percent, much, much higher than it would like, sees inflation uncomfortably low.It worries about deflation, as your report announced.
And it wants to boost the U.S. economy with a bit more monetary stimulus. Now, traditionally, what the Fed would do in that situation is, it would cut short-term interest rates. But short-term interest rates are already at zero, so it can't do that anymore. So, it's now going now another route. And that route is designed to bring down long-term rates.
So, it prints money, buys government bonds.And the idea is that it brings down long-term interest rates.And that boosts the economy in several channels.One is, it encourages investment.The other is that it boosts asset prices.And the third is that it might mush down the dollar.And that's the one the rest of the world is very unhappy about.
And, so, Eswar Prasad, it's only been a few days since all this started.Has it had an effect so far?
In the U.S., probably not, but it is having a big effect on the rest of the world.
Even the prospect of the U.S. Federal Reserve pumping money into the economy has already led to a lot of money flowing to other emerging markets and other economies around the world.And the fall in the value of the dollar is what everybody is concerned about, because most economies around the world have been relying on exports to get them out of the recession, not just China, but also advanced economies like Germany and Japan.
And who are you going to export to?So, they're still looking to the U.S.So, if the U.S. dollar's value falls, then you're going to have serious problems about where these exports go.
And for emerging markets, it's a triple whammy, because there's a lot of money flowing to them, and they're getting higher inflation.Their currency values are rising.And they're getting these big asset market bubbles because of all the money coming in.So, they don't like what the U.S. is doing.
Now, Zanny Beddoes, are all these countries angry at the United States at this policy?And who is angrier than everybody else?
You know, I think that they're not all that angry.
And I think if the more — the more sane part of the argument and the people who are — there's a lot of rhetoric before this big meeting in Seoul. And there's a lot of people who are relieved, particularly the Chinese and the Germans, that they're no longer the focus of everybody's attention, that the U.S. is.
I think what President Obama said is absolutely right, that the world economy would be much, much worse off if the U.S. was stagnant or let alone in deflation.And I think the way most policy-makers around the world do this is, if quantitative easing, which is this policy of printing money to buy bonds, were clearly going to work and prop up the U.S. economy, then that would probably be a good thing for the world economy.
But I think what people worry about is that it may not be that effective, and it does have a negative effect on some other countries, or at least they perceive it to have that.
Now, these economic powers that are meeting, the so-called G20 group, are they going to do something about this at the meeting?Are they going to vent?What's going to happen?
They're going to vent.
And, as Zanny says, the reality is that having the U.S. economy grow strongly is a good thing for everybody.
But the problem is that, in the short run, even in the U.S., it is sort of obvious that the benefits are going to be much greater than the risks. But as far as the rest of the world is concerned, the benefits are very tenuous, but the risks are very immediate, because the dollar's value is falling. Plus, you're getting all this money flowing to specific countries like the emerging markets.
So, they're going to try to figure out a way to resolve this.Now, ultimately, people do want the U.S. economy growing.And they understand that the U.S. is doing this basically because it's going to help the U.S. and the rest of the world.But it going to require action by other countries as well.And whether other countries are willing to step up to the plate and start absorbing more exports and more demand themselves is the big question.
So, does it matter what President Obama says at this meeting or not about all this?
I think does it matter, because the point of these meetings, these gatherings of the G20, I think, is to be a sort of club, a discussion group, if you will.
Indeed, all the right countries are represented.This is the — the G20 is the world's big economies, both emerging and rich.And you've got all the big players around the table.And if they are coming up with at least a kind of common strategy, a common way forward, that's a very good thing.
That's what they did at the height of the crisis, at the height of the financial crisis in 2008, early 2009. The G20 was seen as very successful, because they all said, we're not going to allow a second depression to happen. We're going to stimulate the world economy. We're going to do all of that.
Now,I think, if it appears that they are bickering at other, they're shouting at each other, they're blaming each other, that has a very negative effect.But if they're around the table and they actually come up with something, even if it's not terribly detailed, but it's a kind of joint communique, a joint statement, then that's a very useful thing to do.
Eswar Prasad, what about the other issue that's been out there for months and months people have been looking to be discussed at this meeting, and that is this — this ongoing global concern some countries are exporting too much, other countries are consuming too much?
The whole issue is framed in the context of jobs, because this has been a recovery where there has been very little employment growth in even the economies that are doing very well, like the red-hot emerging market economies.
And the export sector (INAUDIBLE) is very good at generating jobs, which is why every country wants to make sure that it maintains export growth.Now, of course, having a competitive currency helps you on that.So, every country is trying very hard to keep its currency values down.
And this is the big risk here.If these countries don't get together and come up with a sensible solution, you could have more explicit trade protectionism or financial protectionism.And that's not good for anybody.
So, what are the prospects over the next few days on this, Zanny, and where does the U.S. come out of this?
Well, I think the prospects are actually not as gloomy as many people think.I think they will not have a shouting match there, at least not a public shouting match, and that there will be some broad framework that they all sign up on.
It won't be anything terribly detailed.We will all be able to say, oh, this is all just a lot of guff.But, actually, there will be a defense — they will all be — they will be a photo-op.They will smile.
And I think that this — I'm quote surprised at the degree of sort of rhetorical appropriateness being thrown at the U.S. in the last week.And I think it's not been really terribly helpful.
You mean over the Federal Reserve.
Over the Federal Reserve action, because these are related. This rebalancing that Eswar talked about, this — the basic shift that has to go on in the world economy is that we have to stop relying on the U.S. to be the spender, and the spending has to come more from big, emerging economies.
That has to happen. Everyone knows it has to happen. And that's really what the G20 is trying to kind of manage, that process towards that. And this action by the Federal Reserve is understandable in the U.S. context. I think it probably makes sense. But it has been a sort of big diversion from the focus in…
… what really ought to be the focus at the G20.
So, are you as sanguine about what could come of this meeting?
I think the reality is that the dollar has to fall in the long run.The problem is nobody wants it to happen too soon and they don't want it to happen right now.
I don't think the other emerging markets and the big developing countries as well are going to be very happy to be told to keep their trade surpluses at a certain level. So, I think we will get a slightly papered-over outcome, where the differences are papered over. But there will be substantial differences in terms of actual policies.
And whether, after they go back home, the G20 countries will actually do what is necessary for this global rebalancing of growth that Zanny talks about, there, I'm far less sanguine.
Is that what you look for coming out of this meeting?
Yes.And that's what I hope would happen.
And I'm with Eswar.This is a long road.It's not going to happen overnight.And there are going to be setbacks.But I think that having these kind of meetings is actually useful in going in that right — in the right direction.
Zanny Minton Beddoes and Eswar Prasad, thank you both.
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