Racing to the cliff

When someone wakes up the morning after a bender, head pounding, clothes rumpled, the cold floor where he fell asleep hard against his face, the last person he should trust is the chap who sidles up to him with a beer and says, "Hey, buddy, have another on me".

Enter Ben Bernanke, chairman of the United States Federal Reserve Board. Faced with an anaemic economic recovery, the US central bank opted this week to proceed into a second round of "quantitative easing" - using its balance sheet to buy US government bonds, and thereby pumping more money into the economy.

Why this should do any good is anyone's guess. By driving interest rates down closer to zero, the Fed hopes to do two things - spur investment and spending, and provoke expectations of future inflation. As we know all too well in Jamaica, when inflation is high, it doesn't pay to save, and we rush to spend money before it loses its value.

But we also know what a hangover that leaves us with. We're still struggling to recover from the bubble and bust of the 1990s. America is facing the same problem - a nation that went on a Cash Plus-like buying spree, blowing its savings and running up debts, and now wants nothing more than to restore a bit of balance to their lives. The problem for the Fed is that because Americans have been saving so much more since the bust, they're not spending. Hence, the risk is that the 'paradox of thrift' will cause the economy to go back into recession, further worsening the state of most Americans.

Bernanke's goal

In fairness to Mr Bernanke, he may not really be trying to get his countrymen to try hair of the dog. His goal may be something different, but no less risky. Mr Bernanke doesn't want the hung-over American to drink his way through a hangover, he's secretly hoping that if he presses the beer on him, he'll try to get his teetotal friend to try it.

Flooding markets with US dollars will drive down the value of the greenback, in effect, a devaluation. We know about devaluation - it cheapens exports and makes imports pricey. The US government is hoping the US can export its way out of recession and the Fed is playing willing accomplice.

The problem is, who will buy all that stuff? Governments across the developed world have been cutting their spending sharply for fear their debts will explode. The new Republican Congress will push the White House to do likewise. Everywhere, demand is likely to drop. Yet all these governments are hoping recession won't follow because - surprise of surprises! - their countries will all export their way back to growth.

So who's the non-drinker they all hope will consume what they have to sell? China. With a large current-account surplus and lots of reserves, the Chinese are certainly in a position to begin buying. But, so far, they are keeping their pocketbook closed, complaining that their economy is slowing down now, anyhow. They are also speaking angrily of America's effort to foist its exports on China by driving down the dollar.

Global currency war

If China opts to devalue its currency, in line with US moves, a global currency war could break out. The consequences for the world economy are potentially disastrous. In the 1930s, the Great Depression resulted from the efforts of countries to use tariffs to keep out imports. Today, trade agreements have ruled out the use of tariffs as trade barriers. Nothing stops governments from using their currency in the same way.

That is exactly what they are starting to do. It's a bit like a game of chicken, with everyone racing towards the cliff-edge, waiting to see who'll slam the brakes first. The problem is, if someone doesn't stop soon, all the cars may end up shooting over the cliff and into the abyss.

It's enough to make you take that drink after all. But watch this week's G-20 Summit in Seoul and see if someone finally blinks.

POSTSCRIPT: If ever a man embodied the term "gentleman scholar", it was Barry Chevannes. We will miss you terribly, Barry, for your passing has left a void that can never be filled.

John Rapley is president of the Caribbean Policy Research Institute, an independent research think tank affiliated with the University of the West Indies, Mona. Feedback may be sent to columns@gleanerjm.com.