The Falling Dollar and Developing country Exports

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Thursday, 11 November 2010 05:44

The Washington Post notes that the Fed's new round of quantitative easing will:

"harm exports from developing countries. That's because steps to lower U.S. interest rates and put money into the economy have the effect of making other countries' currencies more expensive."

If world imbalances are going to be addressed, then developing country exports must be hurt. In economic theory, rich countries like the United States are supposed to have trade surpluses. This means that they export capital developing countries. The logic of this pattern of trade is that capital commands a higher rate of return in fast growing developing countries in which it is relatively scarce.

There were in fact substantial flows of capital from rich countries to poor countries prior to the East Asian financial crisis in 1997. However, the harsh treatment of countries in the region by the I.M.F. led developing countries throughout the world to focus on accumulating vast amounts of reserves in order to avoid ever being in the same situation. This meant that developing countries had to run export surpluses with the United States and other wealthy countries.

In effect, the I.M.F, under the guidance of the Rubin-Summers Treasury Department, put in place a dysfunctional system that would inevitably explode. The effort to re-balance trade is about reversing those policies.