The Federal Reserve may have the right intentions with a new $600 billion capital injection to battle a slow growing economy and deflation but the BRIC countries and other emerging economies reap the benefits, many economists say.
The US markets applauded the new round of quantitative easing last week and many small business owners expect that this will result in US banks lending more easily, but that may not be the case when one thinks global.
The funds that the Federal Reserve pumps into the US economy to keep interest rates low and encourage consumer spending to light a fire under a sluggish US economy will find their way more easily abroad rather than in the US.
Ben Bernanke’s plan to buy $75 billion of US Treasuries per month in addition to the $23 billion per month that was already earmarked previously will certainly keep interest rates low but that does not necessarily equate to a revival of the US economy nor does it mean more lending to small business owners in the US.
On the contrary, most of the QE funds will find their way into fast growing economies with a higher rate of return such as Brazil, Russia, India and China.
All of the BRIC economies currently grow at an average pace of 8% and the yield derived from investing abroad rather than in the US will pay a hefty dividend on two separate fronts which explains why the capital injection is leaving the US economy faster than the US Treasury can print the money.
US corporations who currently derive 60% of their annual revenue from foreign sales benefit from a weakened dollar due to quantitative easing. That may seem promising to the average American as that would normally result in higher private capital that can be invested in infrastructure and therefore would create jobs and reduce the unemployment rate.
There is however a little problem with this deduction and that is the existence of off-shore corporate accounts that do not repatriate the foreign revenue back to the US but instead invest it back into the global or off-shore economy. The reason for that is the current corporate tax structure, set at 35%, that is non-competitive with the global corporate tax rates.
The result is a large quantitative easing to fix the US economy while encouraging US corporations to invest in foreign countries rather than in their US production and manufacturing capabilities.
That does not result in more lending for small businesses nor does it result in job creations in the US. Instead, it actually makes the BRIC countries and emerging markets grow faster than they already do which will widen the existing trade gap even further.
In addition, the policy also reduces the purchasing power of US consumers because of upward price pressure on imported goods.
In essence the US monetary policy is a “double whammy” for the average American consumer both from an unemployment perspective as well as a dollar value perspective.
The producing economies, BRIC and other emerging economies such as Vietnam, Taiwan and Singapore, are becoming the beneficiaries of US capital injections which will further increase the outstanding debt, reduce the dollar value and keep unemployment rates high.
Written by Nick Doms © 2010, all rights reserved.
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