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.