Rest of the world itches for a fight with US

Get ready for a “Shellacking.” President Barack Obama’s one word description of the drubbing the Democrats suffered in last week’s mid-terms equally well describes what the rest of the world fears it will suffer as a result of QE2.

In recent days, commentators have argued that gridlock in Congress will be good for business. It will give Wall Street and Main Street clarity that nothing will get done. And even if the political game plan is for Obama to tack more to the centre, a general inability to pass new laws is inevitable.

In the circus that is the US capital, one thing is clear – the Fed has been left holding the baby. But the argument that $600bn (£370.6bn), pumped into the economy can alleviate US unemployment holds little water with economists divided about the benefits of QE2.

On Saturday, Fed Chairman Ben Bernanke said his central bank’s duty is to focus on the US rather than overseas economies when trying to spur the recovery. “The first goal that we have is to meet our mandate to get price stability and maximum employment in the United States,” Bernanke said. His QE2 programme won’t push US inflation to “super ordinary” levels, he claimed. What it will do, according to Bernanke, is make loans cheaper and get Americans to spend more, thereby creating more jobs.

It is an argument that helps to explain why many around the world are now itching for a fight with the US. They fear, with good reason, that QE2 will help fuel the dollar’s fall against the yen, euro and almost all the currencies in the emerging world, making it harder for those nations to exports goods. All of which is adding to fears of a bitter currency war.

The Chinese vice foreign minister has said the US owes the world an “explanation on their decision on quantitative easing”. The Brazilian central bank president has been equally scathing, saying QE2 is creating “risks for everyone”.

Countries like Brazil are now facing hot money flows looking for yield unavailable in the US, creating asset bubbles. That is triggering capital controls by countries trying to fend off a weak dollar and a desperate scramble by central banks to counter the Fed’s inward looking moves.

Germany’s finance minister Wolfgang Schäuble’s derisive description of QE2 probably best describes the mood around the world. He quipped that QE2 won’t solve America’s problems, but it will create extra problems for the world. It’s time to start worrying.

Maithreyi Seetharaman is a CNBC anchor
http://europe.cnbc.com