The Fed's aggressive plan to expand its balance sheet — and thereby dramatically increase the U.S. money supply — has driven the dollar sharply lower against all major currencies.
The clear winner from the dollar's decline is the export-driven economy of China. The Chinese currency, the renminbi, is more or less tied to the dollar. The Chinese run a foreign exchange system vis-a-vis the dollar, which traders sometimes refer to as a "dirty peg" (meaning: It's permitted to move against the dollar in an orderly fashion and by small increments).
The bottom line: A weak dollar equals a weak renminbi. So the dollar's drop gives a boost to Chinese exports, which are currently in freefall in the face of weak global demand and an uncompetitive currency.
That is, until yesterday.
Since the Fed move, the renminbi has lost 10 percent of its value against the euro.
The Chinese last week expressed concern about the growing size of U.S. government debt obligations. And understandably so. Bonds had struggled badly since the start of the year, with the yield on the 10-year note rising from just over 2 percent to 3 percent — a reflection of concern over the U.S.'s ability to continue to fund its ever-growing debt load.
China is the largest foreign player in the U.S. bond market, often buying about a third of newly issued paper and holding about 27 percent of total U.S. long-term government debt (the Japanese own another 24 percent).
Yesterday's Fed action triggered the biggest one-day move in the U.S. 10-year note since 1962. It was a windfall day for bond investors and therefore, a day of fat profits for the People's Bank of China.
In a blink then, the Fed made the renminbi more competitive and allayed concerns about a drop in U.S. bond prices. It was a major win-win for China.
But for Europe, it was a double-whammy negative. Euro strength will further pressure the Eurozone's ailing export-sector and the Fed's move puts European economic policymakers even further out of step with the rest of the world.
Leaders of countries where the euro is the currency have been slow to cut rates throughout the crisis; they've always been a couple steps behind the U.K.. These leaders have not engaged in genuine quantitative easing, despite meak claims to the contrary; they have refused to put forth a large-scale coordinated fiscal stimulus package, instead choosing piecemeal fiscal action which is far less potent; and they have focused on stabilizing the banks (laudable in and of itself) and bank regulation — almost to the exclusion of everything else.
There is no question that Fed Chairman Ben Bernanke's increasingly aggressive monetary tactics stem from what he and most economists believe is a much-needed, all-out attempt to stabilize the U.S. economy.
Nonetheless, the Obama administration has been keenly disappointed in Europe's failure to use the G20 as a venue for a global effort to combat recession. Instead, German Chancellor Angela Merkel, French President Nicolas Sarkozy, and Jean-Claude Trichet, head of the European Central Bank, have bogged things down by talking endlessly about financial regulation.
In the wake of last week's European-American economic policy tensions, nothing could have provided a sharper slap to Europe's face than what the Fed did yesterday.
The timing does not look coincidental.
The U.S. just gave a boost to China's economy through an effective 10 percent currency devaluation. It has also validated the aggressive monetary moves of the U.K., Switzerland, and Japan. A new economic order may be in the nascent phases of development, while evidence is mounting that Europe is on a path to its own lost decade.
They will have no one to blame but themselves.
Andrew Parlin is co-founder of Parlin Investments, an investment partnership in Boston.
For more on the global economic crisis:
http://www.globalpost.com/notebook/commerce/090319/opinion-fed-move-big-boost-china-leaves-europe-the-cold