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carl mortished

America is no longer in charge, not of the global economy, nor of its own economic destiny. If anyone retains nostalgic affection for the imperial role of the U.S. Treasury and the Federal Reserve, they should listen to the tone of the voices erupting from emerging markets after the decision in Washington to inject $600-billion of new cash into the market.



We no longer hear polite criticism from the deep-pile carpet of international diplomacy but, instead, withering contempt: "It's no use throwing dollars out of a helicopter", said Guido Mantegna, the Brazilian finance minister. Brazil is preparing itself for a bruising confrontation with America at the G20 summit in Seoul next week as is China.



Ciu Tiankai, a senior official and G20 negotiator in Beijing's foreign ministry, has dismissed a U.S. proposal that governments seek to end global trade imbalances by regulating their current accounts. According to a report in the Financial Times, Mr Cui said that the idea, suggested by Tim Geithner, the U.S. Treasury Secretary, of keeping current account surpluses or deficit within 4 per cent of GDP was archaic. "[It]remind us of the days of planned economies." Instead, Beijing thinks that America needs to stop printing dollar bills.



These warnings should be heeded in Washington. Unfortunately, American policy-makers are only interested in what happens on Wall Street. The absurd rally in the Dow and in Asian markets on Thursday where traders got busy doing carry trade - borrowing cheap dollars to invest in high-yielding Asian junk bonds - will continue for a little while but it won't kick-start the U.S. economy.



There is also flight to equities as investors watch for the first signs of inflation and begin to bet on America running away from its debts by trashing its currency. The Fed seems to believe that it can bribe U.S. consumers into relaunching growth with cheap money. Sure, if long-term U.S. interest rates are less than 2.5 per cent, there isn't much point in saving your pennies -- but what if you don't have any pennies to save? Americans are already the world's biggest spenders and too many are now unemployed. The tidal wave of QE2 cash will just expand a commodity and emerging market bubble that needs no inflation.



Meanwhile, the world's biggest funds are starting to shun paper issued by over-indebted governments. Russia's sovereign wealth fund has struck Ireland off the list of acceptable bond issuers. Ireland has been forced to go back to the drawing board and impose a further round of €6-billion in spending cuts and tax increases. After the recent bank bailouts the International Monetary Fund has calculated that the Irish government will need this year to finance a deficit equivalent to more than a third of the size of the Irish economy.



The Irish 10-year bond yield soared to 7.6 per cent in reaction to all this and many bond analysts think it is only a matter of time when the Irish government is forced to seek help from the EU's rescue fund. The Irish people have been remarkably tolerant so far of austerity. Perhaps America's problem is that austerity is just not something they know how to do. The new U.S. Congress, with added infusions of tea following the recent elections, may be gung-ho for spending cuts but how will these radical Republicans react to the necessity of tax increases? What we can probably expect, therefore, is more debased dollars pumped into the market next year.

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