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Home Publications Blogs Beat the Press How Could Brazil and Thailand Be Worried About Both a Falling Dollar and Rising Inflation from QE2?

How Could Brazil and Thailand Be Worried About Both a Falling Dollar and Rising Inflation from QE2?

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Friday, 19 November 2010 05:54

It's okay for reporters to point out when important people aren't making sense. In fact, it is really part of their job.

We are told in the same piece that there is concern that the Fed's QE2 policy will drive down the value of the dollar and also that:

"Brazil, Thailand and other emerging economies, which fear that a surge of foreign capital will drive up prices and interest rates."

In this situation, it is appropriate to point out these views are contradictory. If the dollar falls in value relative to these countries' currencies, then it will make imports from the United States cheaper, driving down prices in these countries, not pushing them up. A lower dollar will also reduce exports from these countries, which will lower employment, thereby also reducing inflationary pressures. An inflow of foreign capital would be expected to push interest rates down, not up.

In short, if the views of the leaders of these countries have been presented accurately, then they badly misunderstand basic economics. This should have been pointed out to readers.

Comments (5)Add Comment
...
written by fuller schmidt, November 19, 2010 1:23
Factual economics don't make good bumper stickers or slogans. That's what the propagandists are counting on.
...
written by izzatzo, November 19, 2010 1:49
As a professional journalist, I discovered that Googling up the difference between exports, imports, capital inflows and capital outflows was too exhausting after 15 minutes.

When reporting on economics, it's much easier to just say that whatever is going on will result in inflation. Everyone believes it anyway and it keeps me on the good side of mainstream journalism. After all, my career is at stake.

I could lose my job. It's very competitive you know, not like one of those phony jobs created by government spending and deficits and stuff like that.
Different Inflation Strokes
written by Ellen1910, November 19, 2010 9:59
The price of imports from the United States (mostly intellectual property and banking and insurance services) have little direct effect on the Thai economy, but that doesn't mean that a falling USD will not elevate Thai inflation.

The reason the dollar falls is that dollar holders are buying other currencies. Why are they doing that? Answer; In order to stockpile commodities (global) and to buy non-U.S. equities and real estate (local, in Thailand perhaps). These purchases will increase the costs of Thailand's economically significant imports (commodities) and cause asset inflation in Thailand's local asset markets.

Thailand's central banker will see himself as called upon to raise interest rates and lower economic activity in order to counter the effects of commodity inflation and to prevent the development of bubbles -- not, from his point of view, a happy prospect to be faced with an overheating economy made so by the manipulator of the world's reserve currency.
You're forgetting those "capital flows"
written by Procopius, November 20, 2010 9:44
Ellen1910 has it right, but I don't think she emphasizes enough the effect of American investors buying bonds and stocks in Thailand (real estate is more complicated because of Thai law prohibiting non-citizens from owning land). Because interest rates on bonds are so low in the U.S., and there are so few profitable investment opportunities, capital is being used to buy bonds and stocks in Thailand to get a higher return. This increases the money supply in Thailand and creates inflationary pressure. On top of that, there is a lot of demand that the central bank keep the baht from appreciating too much, and using baht to buy up dollars also increases the local money supply. The last number I heard was that the Bank of Thailand had only about $80 billion U.S. dollars in its reserves, which any large hedge fund could overcome (George Soros is widely blamed for the 1997 meltdown here, although he says [and I believe him] that his fund wasn't speculating in baht that year).
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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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