Made in America, imported by Asia.
In a reversal of the trade flows that have so unbalanced the global economy, some of the dollars that the Federal Reserve is expected to start minting soon to buy U.S. Treasury bonds will wash up on Asia's shores, presenting a headache for policymakers already fretting about rising inflationary pressure.
Resentment in emerging markets about the global spillover effects of easier U.S. monetary policy is likely to hang over next week's summit of the Group of 20 leading economies in Seoul.
"What will happen with another round of quantitative easing by the Fed? It's creating inflation, alright. Just not necessarily in the U.S., but on the other side of the globe," said Frederic Neumann, an economist with HSBC in Hong Kong.
In fact, a lot of investors are counting on the Fed to succeed where the Bank of Japan has long failed and generate inflation at home, too.
U.S. core inflation of 0.8 percent is lower than it has been since the early 1960s, but asset managers have been snapping up Treasury Inflation Protected Securities and other hedges against rising prices. Gold scaled a record nominal peak last Friday.
On the face of it, though, worries of inflation in the developed world any time soon are akin to a malnourished man refusing to eat more for fear of growing obese.
In a world of substantial excess capacity, high unemployment and tightening fiscal policy, inflation is likely to remain low in rich countries, the International Monetary Fund said in its latest World Economic Outlook, published last month.
It saw deflation as a more pertinent threat and projected that excess supply in the United States and the euro zone would not be used up until 2014.
"For high inflation to emerge, there would have to be multiple shocks, including a sudden move to financial or trade protectionism that would undo much of the integration of markets that has taken place over recent decades. Such a scenario seems remote," the IMF said.
TOO MUCH SLACK
Indeed, without significantly stronger financial and structural policies, potential output in rich economies is likely to remain appreciably below pre-crisis trends, the IMF said.
And, it added, any mistakes by governments in rolling back public deficits could cause a long period of deflation or low inflation and disappointing economic growth.
Jan Hatzius, chief U.S. economist at Goldman Sachs, said there was so much slack in the economy that U.S. interest rates might stay close to zero for several years:
• the capacity use rate in U.S. manufacturing is currently 72.2 percent, compared with a long-term average of 80.7 percent; for utilities, the rate is 79.4 percent versus 87.6 percent.
• residential and commercial real estate vacancy rates are well above their long-run averages.
• the Labor Department's "underemployment" rate is 17.1 percent compared with an average since 1994 of 9.8 percent. In addition to the unemployed, the rate counts those who have given up looking for work and part-timers who want a full-time job.
Against this background, Hatzius said a widely followed rule of thumb for the appropriate stance of monetary policy, named after economist John Taylor, points to the need for the fed funds rate to be around minus 5 percent now, not zero.
As such, Hatzius expects the Fed to announce after its policy-setters meet on Wednesday a second asset-purchase program initially worth $500 billion and eventually expanding to $2 trillion.
The impact would be to add half a percentage point to U.S. growth through the stimulus of lower bond yields, a wealth effect from rising equity prices and a knock-on drop in the dollar.
Speaking in Beijing this week, Hatzius said the impact of "QE2" would be benign for Europe, where growth is weak, because it would let monetary conditions stay looser for longer.
"But in some parts of the world, it causes more problems. And Asia is probably in the latter camp," he said. "If there are spillovers into countries that are already on the verge of overheating, then domestic policymakers are going to tighten more than they otherwise would."
WHAT'S THE POLICY MIX?
Which leaves markets grappling with what form the tightening will take — currency appreciation, tougher monetary policy or fiscal restraint.
Australia and India both raised interest rates on Tuesday, as did China on October 19. While the Reserve Bank of India signaled a pause in its tightening, the World Bank called on Wednesday for China to keep raising rates.
Andrew Colquhoun, head of Asia-Pacific sovereign ratings at Fitch in Hong Kong, said China's capital controls help it keep out unwanted inflationary inflows — but only up to a point.
"The Chinese authorities have many tools at their disposal with which to lean against these sorts of pressures. They're going to have to use those tools more aggressively than they otherwise would have done if the Fed goes for further quantitative easing," he said.
The United States, of course, would like China to tighten by allowing its exchange rate to rise faster.
While politicians focus on the nominal rate of the yuan against the dollar, China's higher inflation rate is already pushing up the economically more important real exchange rate.
Indeed, Bank of America Merrill Lynch last week nudged up its forecast for inflation across emerging Asia in 2011 to 4.0 percent from 3.3 percent and said rising bond yields suggested investors were already on the scent.
"This highlights one of the great ironies of QE2: it creates inflation in the region that least needs it," economists T.J. Bond and Marcella Chow said in a report.
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