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Randall Wray on why QE2 threatens the dollar

Quantitative easing by injecting money into banks has dangerous side effects that injecting money straight into the economy does  not.

…I do agree with critics that such a status implies responsibilities—responsibilities that the US has not been living up to. The rest of world needs dollars, especially in a crisis. It obtains those dollars by exporting to the US, and by attracting capital flows. But the US is mired in a deep recession, and it shows no signs of willingness to deal with the financial crisis that makes it impossible for the economy to recover. That is not the behavior that one must expect of the issuer of the international currency. Debasing the currency through policy designed to encourage capital flight or inflation is not appropriate to maintaining the dollar’s status. Critics are right to castigate Washington for short-sighted policy. (See this here)

The best thing that can be done, both for the US as issuer of the dollar and for the rest of the world users of the dollar, is to promote economic recovery in the US. This is not a matter of “affordability”. The US government can “afford” anything for sale in terms of dollars. It is a matter of political will. Can the US overthrow the silly pronouncements of deficit hawks, including today’s statements by the “Fiscal Responsibility” commission, ( to formulate a fiscal stimulus package that will put the US on the road to recovery? If so, the dollar’s problems will disappear. If not, run to gold.

Finally, maintaining the dollar’s international appeal also requires imposition of the rule of law in the US. Currently, the fraud perpetrated by the biggest banks is far worse than anything the Russian kleptocrats and mafia combined could possibly imagine. The US is in the grips of the worst scandals in world history, with the financial sector no longer constrained by anything that would be recognizable as lawful practice. And that is the biggest threat to the dollar as international reserve currency. Unless the top banks are closed, with their management jailed, there really is no hope for the US dollar or for its economy. (link to full article)

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