Wednesday, November 3, 2010

What Has Quantitative Easing Wrought? Dollar for Dollar

American and Australian dollars trade one-for-one at Hullubullu stores in Newtown. This is because Australia's central bank is thinking of slowing the rate of growth in Australia's money supply while ours is doing everything it can to increase the supply of U.S. dollars. It is the great American dollar devaluation. This news comes, somewhat ironically at the same time the U.S. government is agitated at China's alleged devaluation of its currency in an effort to gain a trade advantage vs. American producers.

Bank in the summer of 2001 my wife and I took a tour of Italy for our 10th Anniversary. We met a coupld from Australia with whom we are still good friends. At the time they told us that it to two Australian dollars to trade for one U.S. dollar. In other words the price of an Australian dollar was fifty cents American. We went to visit our friends in Australian in 2006 and the dollar was still worth about one and a half Australian dollars, so that the price of an Australian dollar was about 75 cents American. Now the price of an Australian dollar has risen to close to one dollar a piece.

This is exactly what we get for the Fed increasing the U.S. money supply faster than other central banks increase theirs. This is the sort of inflation that Bernanke delights in.


  1. There's some irony to your post as Australia's central bank pursues a higher explicit inflation target than our Fed's implicit one. And it's worth noting that the US/AUS exchange rate has only just recently returned to the (nominal) level it was in 2008, before the flight to dollar safety.

    Indeed, Australia was able to avoid recession in 2009 because it had a higher inflation rate (4% between 2000 and 2008, it was 4.7% going into summer '08) and NGDP growth trend (7.4%) going into the crisis. Its central bank had more room to operate and did a much better job of stabilizing NGDP expectations.

    But your post doesn't mention this...

  2. I don't mention it because I don't think it is relevant. What determines exchange rates are not inflation targets, but the actual supply of and demand for one currency in terms of another.

    It does not surprise me that the value of dollar decreased against other currencies, such as the Australian dollar, before 2008 because the Fed was inflating at a very heatry clip. MZM almost doubled from 2000 to 2008. The flight to dollar safety coincided with a halt in the growth of MZM. Soon, however, it was off to the races again and the dollar began to plumet in value again.

    Without the increase in the money supply since QE1, the U.S. dollar would be stronger against everything including the Australian dollar, that it is now.