As the global economy continues to recover from the recession following the crash of 2007, a troublesome trend of rising in inflation has begun to concern world economic leaders, especially given its timing with unemployment remaining at elevated levels. The root cause of this problem was a major subject of debate amongst the world’s largest economic countries at the most recent G-20 summit in Paris. Many foreign countries pointed the finger for this rise at the United States for the interventionist programs the Federal Reserve has recently enacted, most specifically their quantitative easing program or “QE2.” Federal Reserve Chairman Ben Bernanke countered this point at the meeting by arguing that in fact the elevation in global prices is a result of growth within developing countries and currency manipulation by countries such as China. The disagreement surrounding this global issue is indicative of the uncertain nature of economic forums, such as the G-20, and their inability to directly influence countries’ economic policies. Whether the rise in global inflation is more a result of Chinese currency manipulation or U.S. Central Bank policy, the increase in prices is cause for concern in a global economy which remains highly vulnerable given its unemployment levels.
Germany and China are among a number of countries that have been highly critical of the Federal Reserve in recent months, a trend evident at the November meeting of the G-20 held in South Korea. That meeting came days after the Fed had announced its second round of quantitative easing, a program which was especially criticized given its size and history of debatable success. In theory, “QE2” was initiated in hopes of keeping interest rates lowered in the long-term to stimulate investment and growth by using a strategy which had been used by the Fed earlier in the U.S. stimulus package. For this second round of quantitative easing, the Federal Reserve announced that it would again purchase Treasury bonds, this time in an amount of $600 billion. While proponents of the plan heralded the Fed’s initiative and the merits of low-interest rates to stimulating growth, the program also garnered much opposition both domestically and internationally, a fact that was apparent at the November G-20 meeting. There, countries accused the Fed of significantly contributing to global inflation and of attempting to lower the value of the dollar in hopes of making American products more attractively priced within the international market. Yet the criticism of U.S. monetary policies, along with the accusation of currency manipulation as a root cause of increased global prices, were points Chairman Bernanke’s vehemently questioned in his rebuttal to critics of the recovery plan. Rather than finding the United States’ policies as a direct source of international problems, he instead placed the blame upon overheating within developing economies and deliberate currency devaluation in countries such as China.
Since the announcement of QE2 and subsequent criticism at the November G-20 meeting, Federal Reserve Chairman Ben Bernanke has actively defended and argued against the belief that increased inflation globally is directly linked to this initiative. “Spillovers can go both ways,” he stated at the most recent summit, “resurgent demand in the emerging markets has contributed significantly to the sharp recent run-up in global commodity prices.” Additionally, he has indirectly referenced China’s monetary manipulation as an integral piece of the increase, saying “the maintenance of undervalued currencies by some countries has contributed to a pattern of global spending that is unbalanced and unsustainable.” China’s monetary policy has been greatly challenged in the past due to their strategy of pegging their currency to the United States dollar in an effort to ensure their exports remain competitively priced within the global market. The recent global downturn and ensuing rise in inflation has only exacerbated the calls for Chinese reform and the U.S. is hardly alone in their criticism of the practice. While China has loosened their policy recently and allowed their domestic currency the yuan to gain value, it is still viewed as being artificially devalued. Bernanke, along with numerous other G-20 members, have continued to call for the Chinese to allow their currency to “better reflect market fundamentals” in an effort to transition from an economy based extensively on international demand into one more centered on their own domestic demand. Yet despite the significant rise in the domestic buying power of the Chinese consumer, China’s reluctance to allow their currency to directly reflect international market valuation has continued to increase trade imbalances and promote and unsustainable economic relationship between China and the world.
Though fervent in his defense of Federal Reserve initiatives, Chairman Ben Bernanke did not attempt to completely clear the United States from blame in the recent inflationary developments. While criticizing countries which manipulated their currency for increasing trade imbalances and international cash flow, he also called for countries such as the U.S., which are large next importers, to increase domestic saving and balance budget deficits. Unfortunately, the G-20 countries as a group lack any official ability to sanction or influence an individual country’s economic policy decisions. Instead, the group must rely on the voluntary agreement of a country to submit and adhere to a G-20 policy or decision. This is particularly significant when considering Bernanke and many countries’ desire to see countries like China loosen their monetary policy, and countries such as the U.S. to be more responsible and restrictive in their spending. These idealistic desires, if followed, would certainly promote growth, stability and lower inflation within the international economy, yet the lack of leverage within groups like the G-20 to directly facilitate implementation of such policy means that world powers can continue to remain self-interested first and globally conscience second. While this may seem more appealing domestically, ultimately, it also works to perpetuate issues such as the current inflationary problem dragging on global recovery efforts.
Global inflation, which has increased prices in places like China over 5% in the last year, is becoming increasingly disconcerting for the economic leaders of the world. As exhibited especially at the two most recent G-20 summits, the cause of this rise is both uncertain and highly contentious. Many countries feel that the United States’ domestic bond-buying programs, such as the second round of quantitative easing, have directly influenced the elevation of global prices, a claim which is far from unanimously agreed upon. Others, such as Federal Reserve Chairman Ben Bernanke, argue that the problem is hardly a result of a single country’s actions but rather a result of the rise in demand within developing economies instigated by currency manipulation and fiscal irresponsibility amongst global economies. While Bernanke’s calls for an increase in global consideration and cooperation amongst the G-20 members are admirable, the group’s lack of tangible power to implement these policies has continued to make international agreements frustrating and difficult to enforce. Ultimately, this reality means that finding a solution to international economic problems within the tentative global recovery remains difficult, a fact illustrated by the current issue of global price inflation.