Monetary Policy No Longer Made in America

With increasingly interconnected global financial markets U.S. monetary policy is no longer just made in America. This point is brought up in an article in Bloomberg Business, saying that U.S. monetary policy is increasingly made in China, and elsewhere.

Here’s something else for Donald Trump to fulminate about. U.S. monetary policy is increasingly being made in China, not in the good old U.S. of A.

That’s an exaggeration, of course, but it’s more than just misleading click bait. It’s indicative of a broader reality that Federal Reserve policy makers more and more recognize. No central bank – even the world’s most powerful – is an island. With increasingly interconnected global financial markets, what happens overseas often quickly redounds on the U.S., and vice versa.

As an example the Fed backed off a rate increase last September citing “risks around China.”

The direct effect of a cheaper Yuan is minimal for US exports as US exports to China are less than 1% of GDP. The larger issue is that China is a big consumer of raw materials and when its industrial plant slows down so do orders to developing nations for iron ore, coal, oil and a whole host of other commodities. That is what has hurt emerging markets and by extension the global economy. And it is why to a great degree monetary policy of the Fed is no long solely made in America.

Debts in Dollars and Profits in Yuan, Rubles or Pesos

A serious issue for many emerging economies including that of China is that much of business debt is denominated in US dollars while profits come in the local currency. An exception is the oil producers (and coffee producers) whose products are denominated in US dollars. An increasingly weak local currency drives investment capital to the USA and sends the currency downward in a death spiral. However, producers of commodities still denominated in dollars can do well if their expenses are all local. The issue for oil producers is the glut in crude oil and historically low prices. Although US oil companies are hurting the US consumer has money in his pocket as noted in an article on our sister site, ProfitableInvestingTips.com, Where Are Consumers Spending the Money They Are Saving on Gasoline?

What Are the Chinese Doing?

China’s currency reserves are shrinking as we noted in our article, What Is a Trillion Dollars in Yuan? One thought is this.

The problem for China is that a falling Yuan is a self-fulfilling prophecy. Wealthy Chinese take money out of the country because they fear that the currency will devalue as the economy weakens and by their actions cause both a weaker currency and a cheaper Yuan.

This view is reinforced by the large number of wealthy Chinese who are buying property or businesses in the West, but equally important in this equation are Chinese companies who accumulated debt in cheaper dollars and are paying off debt as the dollar rises and Yuan falls. The sum total of the exchange of currencies across the interconnected globe is that monetary policy is no longer totally made in America.