G20 Nations Meet To Discuss Why Printing Tons Of Money Is Bad

President Obama is joining the leaders of the other Group of 20 nations in Seoul, South Korea to discuss increasing the stability of the global economy.  The rest of the G20 is not terribly happy with recent American monetary policy, particularly a $600 billion bond buying program from the Federal Reserve.

As reported in the Associated Press, the G20 nations generate 85 percent of the world’s economic activity.  They frown on manipulating the value of currency to influence global trade.  President Obama wants to narrow the U.S. trade deficit, which is currently pushing $411 billion.  One way of doing this is weakening the dollar, which would make it easier for foreign companies to buy American goods.  For example, if one unit of foreign currency is suddenly worth $1.50 American instead of $1.25, it will spur the foreign customer’s interest in purchasing American goods.

The Federal Reserve bond-buying program, known as “QE2”, would increase the money supply by pumping more cash into American banks.  The plan is controversial, even within the Fed, because many feel a shortage of cash is not the big problem right now.  National Review quotes former vice-presidential candidate Sarah Palin explaining the situation to a Phoenix trade association last Monday:

“It means our government is pumping money into the banking system by buying up Treasury bonds. And where, you may ask, are we getting the money to pay for all this? We’re printing it out of thin air… And if it doesn’t work, what do we do then? Print even more money? What’s the end game here?  Where will all this money-printing on an unprecedented scale take us? Do we have any guarantees that QE2 won’t be followed by QE3, 4, and 5, until eventually — inevitably — no one will want to buy our debt anymore? We shouldn’t be playing around with inflation.”

(As an aside, is “former vice-presidential candidate” really the best title for Sarah Palin anymore?  Love or hate her, you’ve got to admit, that’s like describing Superman as a “former Kansas farm boy.”  A lot has happened since the McCain campaign.)

The United States, and other G20 nations, have long accused China of using currency manipulation to keep its exports high.  China just posted its second-highest trade surplus for the year, and doesn’t like the idea of anyone else messing with its favorable exchange rates.  The AP quotes Vice Foreign Minister Cui Tiankai as saying that “everyone will come out as losers” if a confrontational approach is taken.

Anyone with a printing press in the basement must wrestle with the temptation to solve their problems by printing more money.  The G20 summit provides a fascinating perspective on a deeply interconnected world… many of whose governments will soon be unable to pay for their huge entitlement commitments to restless citizens.  Wealth is found in trade, both at home and abroad, and global trade is conducted within a framework of interconnected currencies, which sometimes looks uncomfortably like a house of cards.