It has been just over a week since Fed Chairman Ben Bernanke pulled out his monetary policy bazooka and announced a third round of quantitative easing. This time QE is open-ended and tied to unemployment, which remains staggeringly high.
Markets cheered the news, even though many economists and analysts expected the Fed would take further monetary action at its September policy meeting.
Despite being the worst kept secret, the Fed's new policy had a positive effect on the markets because "[Bernkane] is breaking the link between monetary policy and inflation," says Axel Merk, president and CIO of Merk Investments and a long-time opponent of Bernanke's easy policy measures. "He is tying monetary policy to the unemployment rate, which means that he is going to do anything he can to push up growth, which means he is going to disregard inflation."
Like Merk, critics of America's central bank claim that the latest round of monetary easing would be perilous for the U.S. dollar, which fell after the Fed's announcement last week.
But a weak dollar is exactly what Bernanke is going for, says Merk, who also manages Merk Funds. The Fed chairman is trying to boost exports by debasing the dollar, which would in turn spur economic growth.
On Thursday, Brazil's finance minister Guido Mantega chided the U.S. central bank for sparking a renewed round of currency wars in an interview with the Financial Times. Mantega decried the Fed's QE2 decision in 2010 as currency manipulation.
But monetary policy is not the solution to America's problems, says Merk, who writes the following in a recent commentary:
Monetary policy affects nominal price levels, not structural deficiencies. In the U.S., the economy may be held back because of uncertainty over future taxes (the "fiscal cliff") and regulation; monetary policy cannot fix these.
While the U.S. remains the world's reserve currency, Merk says that there are no risk-free assets these days.
He suggests investors put their money in a "managed basket of currencies" and gold.
Tell us what you think! Will QE3 spark a currency war?
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