Vol. 74/No. 44      November 22, 2010

The November 3 announcement that the Federal Reserve would inject dollars into the banking system through the purchase of U.S. Treasury bonds caused an immediate drop in the value of the U.S. dollar and a rise in the stock market.

Federal Reserve chairman Ben Bernanke compared the $600 billion infusion to the more than $1 trillion bailout the Fed carried out after the “economic free fall,” which took place at the end of 2008. He said the money would cause mortgage rates to drop, encourage investment, and lead to “higher stock prices [which] will boost consumer wealth,” spending, and a “virtuous circle” of economic expansion.

John Hussman, president of the Hussman Investment Trust, in his weekly note to investors called Bernanke’s statement “among the most ignorant remarks ever made by a central banker.” Hussman pointed out that the measure risks causing “an overpriced speculative bubble with devastating consequences.”

Two major recipients of the earlier bailout, the Fannie Mae and Freddie Mac mortgage finance companies, are still in dire straits. Fannie Mae just reported a $1.3 billion third quarter loss and Freddie Mac a $2.5 billion loss. They are asking for billions more in government aid.

Fannie Mae says it has foreclosed on nearly 167,000 homes and has written off $8.2 billion in uncollectible loans. The drop in home prices, high unemployment, and foreclosures will continue.

Newspaper headlines highlighted a supposed growth of 151,000 jobs in the United States in October based on a Labor Department employer survey. But a separate Labor Department survey of households released at the same time said that the number of people employed dropped by 330,000. Even the more upbeat employer survey indicated that a large part of October hiring was due to retailers preparing for the holiday season, and temporary agencies.

It is unlikely that the $600 billion will have any meaningful effect on loans or investment, even in the short term. U.S. companies are already sitting on $1.8 trillion in cash reserves. In the face of declining rates of profit, capitalists prefer to hold onto cash—essentially nothing more than a notation on a computer hard drive—than to invest in plants and equipment, which does not bring what they consider sufficient returns. Instead they seek ways to use money to “make money” by speculation in stocks, bonds, currency, or derivatives. Adding billions to the money supply, what the Fed calls “quantitative easing,” can do nothing to change this.  
 
Controversial move
The Federal Reserve’s decision was controversial around the world. For at least half a decade, Washington has deliberately weakened the dollar relative to its strongest rivals from France and Germany to China and Japan. Answering criticism that the Federal Reserve was seeking to further lower the value of the U.S. dollar and thereby make U.S.-made products cheaper on the world market, Treasury Secretary Timothy Geithner claimed, “We will never use our currency as a tool to gain competitive advantage.”

Government officials in China, Germany, and Brazil criticized the Fed’s move. Some of the sharpest comments came from German finance minister Wolfgang Schäuble. “It doesn’t add up when the Americans accuse the Chinese of currency manipulation and then, with the help of their central bank’s printing presses, artificially lower the value of the dollar,” he said.

Schäuble was referring to U.S. pressure on China to raise the value of the renminbi, which the Chinese government has resisted. Washington charges that the renminbi’s value is kept artificially low, spurring Chinese exports and contributing to the U.S. trade deficit with China. Washington has also criticized Bonn for its high exports. Germany is the largest economy in Europe and the fifth largest in the world.

As the worldwide capitalist economic crisis continues, trade disputes are heating up. In September China’s commerce ministry announced it was imposing a tariff of up to 105.4 percent on U.S. poultry imports. The move is seen as retaliation for the Barack Obama administration’s imposition of steep tariffs on Chinese tires a year ago. In October Washington said it plans to slap a 60 percent duty on Chinese aluminum extrusions.
 
 
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