Suspicions that the Federal Reserve’s moves won’t save the U.S. are often based on events in Tokyo. Round Rock, Texas, may be a better place to look.
That’s where the computer empire Michael Dell created in 1984 is based. As Fed Chairman Ben Bernanke pumps a new burst of stimulus into the economy, he hopes to spur businesses to hire, spend and help avoid a second recession.
It’s no longer so simple. In September, Dell Inc. sold $1.5 billion in 3-, 5- and 30-year notes. In regulatory filings, Dell said the proceeds were for “capital expenditures, advancements to or investments in our subsidiaries, and acquisitions of companies and assets.” Nine days later, Dell said it will spend more than $100 billion in China during the next decade.
Dell says the money it raised won’t be used outside the U.S. Yet it’s hard not to connect the dots and wonder what the Fed thinks it will accomplish by flooding America with cash when much of it will leak overseas. This is stimulating developing nations in Asia and elsewhere more than the U.S.
There are two reasons why the Fed’s largess is bad for Asia. The first has gotten lots of press: The torrent of hot money is adding to overheating risks. The second deserves more attention: Asian governments gain room to foster the false perception that their region is immune to the West’s malaise.
The internationalization of the Fed has been unfolding for two decades. When Mexico crashed in the mid-1990s, traders from Tokyo to New York looked to the Fed to rescue markets. When Asia blew up in 1997 and Russia defaulted in 1998, markets again turned to Washington. The Fed calmed investors and U.S growth surged.
That was then. An unexpected quirk of globalization is that the mighty Fed has been reduced to tossing monetary experiments at the wall to see what sticks. One round of quantitative easing here to boost growth, another there. And so on, and so on.
Things have gone so full circle that former Fed Chairman Alan Greenspan, a man as responsible as any for the credit crisis, is now taking potshots at the Bernanke Fed. The brouhaha over U.S. interest rates has even made a Fed watcher out of former Alaska Governor Sarah Palin.
All this is having a schizophrenic effect on Asia. On the one hand, it’s giving investors that 1996 feeling. More money is rushing into markets than can be productively used. In 1997, remember, things ended badly.
Premier Wen Jiabao last week said China is drafting measures to counter excessive price increases with inflation at the highest in more than two years. McDonald’s Corp. tells the story. The world’s largest restaurant chain is increasing prices for its burgers, drinks and snacks in China to offset costs. On Friday, China’s central bank said it will raise the reserve ratio requirement for banks by 50 basis points starting Nov. 29.
On the other hand, Asians were the winners from the global credit meltdown partly because of all the cash that arrived in search of better returns. While Asia’s leaders abhor the resulting rise in exchange rates, they understand that capital inflows have benefits. Asia hasn’t had to open the fiscal floodgates the way that the U.S., Japan and Europe have.
The risk is that Asian leaders let this good fortune go to their heads. All isn’t well in the global financial system as Ireland goes the way of Greece. As Europe’s debt crisis broadens and threatens bigger targets like Spain, the global credit crunch might kick up again. And who knows, maybe Ireland will soon be hitting up cash-rich China for a bailout.
Asia has proven it can live without the U.S. consumer, at least for a while. Yet the quality of growth matters as much as the quantity. Is it based on true, sustainable demand or the Fed’s bubbles? There’s reason to think it’s the latter rather than the former driving Asian markets. It means Asia’s current pace isn’t sustainable as long as the $14 trillion U.S. economy and troubled euro zone are limping.
Quantitative easing hasn’t worked for Japan. If it’s going to work in the U.S., capital controls may be inevitable. The Fed must stop the seepage of liquidity overseas. It makes no sense for the Fed to take such monumental risks with its balance sheet if America isn’t reaping the benefits. Wanton U.S. policies also are dangerous in the long run if they make developing nations more vulnerable to boom-and-bust cycles.
That gets us back to Round Rock, Texas. By investing so much in China, Dell is anticipating the trajectory of global growth. Standard Chartered Plc thinks China’s economy will overtake the U.S. by 2020. If so -- and it’s a big if -- Dell is just operating in the best interest of shareholders.
Bernanke shouldn’t be accelerating the process, though, and that’s the upshot of his actions. It’s one thing to take the Fed into unchartered territory. It’s quite another to force-feed the benefits and risks of U.S. policies to other countries.
(William Pesek is a Bloomberg News columnist. The opinions expressed are his own.)
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