U.S. Policies Exporting Inflation

Fed Response to 2008 Crisis Ports Inflation to Other Nations: NCPA


Source: NCPA

Dallas, TX (December, 2015) - The Federal Reserve’s adoption of an expansionary monetary policy following the 2008 recession ignored inflationary warning signs on the dollar standard’s periphery, destabilizing both the U.S. and global economies, according to a new report by National Center for Policy Analysis Research Associate Hector Colon.

“With quantitative easing, the Fed intended for the ‘excess’ liquidity to push up asset prices, probably hoping that the ‘wealth effect’ of higher asset prices would spur economic activity in the United States,” said Colon. “While experts still debate the success of the Fed’s approach domestically, the policy has had noticeable international repercussions.”

The Fed’s actions impacted each country differently, depending on their monetary policy:

  • Inflation in China. China had pegged the yuan to the dollar, allowing the Federal Reserve to control its monetary policy. While China attempted to mitigate the accelerating inflation and oversupply of dollars by investing large percentages of capital abroad, it still experienced a sharp increase in economic activity that included the construction of massive infrastructure projects, opulent government buildings and a housing property bubble.
  • Bubbling Brazil. Brazil saw a huge bubble from 2004 to 2012, with exports rising 500 percent and domestic consumer debt increasing eight-fold as the cost of living rose higher than some European nations.
  • Effects on Mexico. Mexico’s property bubble pushed prices to record levels, but the focus was mostly on commercial real estate. Weaker links between homebuilders and the financial sector meant that the risks for the overall economy were not as serious.

“The current Fed’s policy is the equivalent of a regressive income-transfer policy,” says Colon. “The economic distortions created by these unsustainable policies have produced a sluggish and vulnerable post-recession recovery, and created a workforce approaching full employment, but with the lowest labor participation rate since 1977.”