World financial leaders gather in Seoul, South Korea tomorrow for a meeting of the G-20. Among issues of contention will be the Federal Reserve’s plan to add $600 billion to the U.S. economy. The strategy has been criticized by several countries including Germany, Brazil and to some extent China. Foreign ministers from these countries complain that while the Federal Reserve’s plan may be helpful in the U.S., it will likely drive down the value of the dollar and add new burdens to their own export driven economies: Trade imbalances, currency wars, and ongoing the struggle to right the global economy.


  • Zanny Minton Beddoes Economics editor, "The Economist;" formerly, economist at the International Monetary Fund
  • David Smick Chair and CEO, macroeconomic advisory firm Johnson Smick International, editor of The International Economy magazine, and author of the book, The World Is Curved
  • John Maggs Reporter, Politico


  • 10:06:54

    MS. DIANE REHMThanks for joining us. I'm Diane Rehm. The Federal Reserve's latest effort to boost the U.S. economy has drawn some sharp criticism, both at home and abroad. The plan to pump $600 billion into the U.S. economy is designed to give the economy a boost, but it could lead to inflation and mean trouble for countries around the world who rely on exports. Joining me to talk about the Fed's plan, what it means for global trade and currency battles already underway, Zanny Minton Beddoes, she's economics editor for The Economist, David Smick is editor of the International Economy magazine, John Maggs is a reporter for Politico. I do invite your questions, comments throughout the hour. Join us on 800-433-8850. Send us your e-mail to Join us on Facebook or send us a tweet. Good morning to all of you.

  • 10:08:15

    MR. DAVID SMICKGood morning.

  • 10:08:16


  • 10:08:16

    MR. JOHN MAGGSGood morning.

  • 10:08:16

    REHMGood to have you here. David Smick, you talked about the current global economic challenges, really kind of an interesting puzzle. What do you mean?

  • 10:08:29

    SMICKWell, QE from the Federal Reserve was a bombshell because of the...

  • 10:08:34

    REHMThe QE?

  • 10:08:35

    SMICKThe quantitative easing….

  • 10:08:36

    REHMThank you.

  • 10:08:36

    SMICK...the big, you know, dropping money into the economy aggressively -- a real bombshell for the world. But, I think, to understand what's going on, you have to go back and look at the cause of the financial crisis of two years ago. You know, there's a perfect storm of causes, but the underlying factor was that there were global imbalances. We have the consuming nations led by the U.S. and then the exporting nations led by China. China built up a large pile of money, excess reserves, into the trillions. And they recycled that back to the rest of us, particularly to the United States. And it went into fixed-income investments in particular, and what that did, is it led to the underpricing of financial risk.

  • 10:09:25

    SMICKAnd our policymakers were too foolish to see what was going on. It led to a bubble. There were a lot of other mistakes that went into it, but the rest is history. So the question today is, how do you prevent that from happening again? Well, you do the -- you prevent it from happening by rebalancing the world economy -- in other words, trying to get China and the other exporting countries to become less dependent on exports and to consume more, and then to have us save more and also to get our economy back into balance. The Chinese, who are the central actor in this drama or in this puzzle, they don't want to play this game. And they have -- they actually have been very clever, you know?

  • 10:10:12

    SMICKWe're used to dealing with the Japanese, who diplomatically and strategically were never that clever. The Chinese are very clever. Chinese have a fundamental problem. They -- it's commonly known, you know, that we run a huge deficit with the Chinese. So they run the big surplus with the United States. But China runs a deficit with the rest of the world, and China needs the U.S. market. And China has been very shrewdly doing everything it can to gain market share in the U.S., at the expense of Germany and Japan, and they do this by actions that help prop up the Japanese yen and the euro.

  • 10:10:55

    SMICKAnd so China is afraid because, you know, a stronger currency might threaten their state-run companies. It presents, in their view, a lot of complications. Now, there are many economists who think, in the long run, it's the best thing China can do. But nevertheless they are fighting it. And so they've been playing this game of playing one country against the other. They have the Germans now quite happy to accept a strong euro, even though it's not necessarily the greatest for the rest of Europe because, you know, the Chinese buy all those German cars and German, you know, sophisticated equipment. And they do the same thing with Japan.

  • 10:11:34

    SMICKBut that has left the world very -- this kind of weird puzzle, it's very unstable. And in the midst of this puzzle, where the Chinese were able to kind of keep things confused, this bombshell hits. And the bombshell was Ben Bernanke's quantitative easing. Now, I don't think Ben Bernanke decided, well, let me see, let me get myself in the middle of a world currency war and trade war. There are other reasons we can talk about why he is engaged in quantitative easing.

  • 10:12:04


  • 10:12:05

    SMICKBut the unintended consequence is that it dropped this bomb. And what does it mean? It means that if the dollar weakens, it probably won't weaken against the euro much 'cause the Europeans have enormous debt problems. But it will weaken against all the other non-Chinese currencies, and so they secretly are saying, what's going on? We're -- we play by the rules. We're going to become less competitive against the dollar because the Chinese will manipulate their currency against the dollar. And it has created a huge tempest.

  • 10:12:38

    REHMDavid Smick, he is editor of the International Economy magazine. He's also author of the book "The World is Curved." Today, we see that China's central bank says it going to raise its bank's reserve requirement ratio by half a percentage point, and this is the fourth such increase this year. Now, Zanny Minton Beddoes, what do you make of that?

  • 10:13:14

    BEDDOESWell, I think the Chinese, focusing on trying to slow down their economy, prevent it overheating. They have exactly the opposite problem to the U.S., and that's part of this puzzle, as David put it. I think there are two big things going on in the world economy. The first longstanding one is that because the U.S. economy is weak and many of the other big, rich economies that have been through the big recession are still weak. The kind of composition of global spending has to shift. The U.S. consumer is not going to be the engine of the world economy anymore. And so the new engine has to come from spending at home in fast-growing emerging economies, China particularly but also others.

  • 10:13:49

    BEDDOESAnd China's exchange rate policy, as David explained, is preventing that from happening. It's not the only thing, and it certainly wouldn't be a kind of magic solution if they raise their exchange rate. But that's part of the shift that has to take place, what economists constantly talk about -- rebalancing the world economy. And that rebalancing simply means more spending from the emerging economies, relatively less from countries like the U.S. And that's the main focus of this G-20 meeting this week. It's really a longstanding debate about how do you get that rebalancing and the kind of bombshell, as David put it -- I think I would put it less as a bombshell and more as a sort of experimental medicine from the Fed.

  • 10:14:29

    BEDDOESWhat the Fed has done -- I think we have to think of that somehow separate. This is not a -- they didn't do this to change the terms of the discussion of global imbalances. The reason the Fed acted is that the Fed saw a U.S. economy where inflation is lower than we want it to be and unemployment is much, much higher, and they see no possibility of any real action on fiscal policy. Congress isn't going to do very much. No possibility of any real structural changes in the U.S. economy dealing, say, with the housing mess.

  • 10:14:57

    BEDDOESSo the Fed is the only institution in town that can act and that can do something, and it has started to act. That has the second effect of -- one of the things it might do is push the dollar down a bit and push some capital to the emerging economies. And that's why they're angry. But I think it's wrong to think that the U.S. is trying to do this -- the Fed is trying to this to somehow, you know, based that its goal has anything really primarily to do with the dollar.

  • 10:15:22

    REHMZanny Minton Beddoes, she is economics editor for The Economist. She's formerly an economist at the International Monetary Fund. John Maggs, talk about the criticism first here at home about what the Fed has done.

  • 10:15:43

    MAGGSWell, I think you're starting to see a certain strain of conservative criticism here at home alleging that the Federal Reserve has already borrowed too much to try to stimulate the economy that -- and there's some legitimate concern among economists, I think, that at this moment the $600 billion that the Fed has chosen to put into the economy will not be a very effective form of stimulus. But it is somewhat ideological.

  • 10:16:13

    MAGGSI think the best known would be Sarah Palin, the former governor of Alaska, has come out and decided that she's interested in what the Fed is doing, which is, I think, news in itself that Sarah Palin will be watching and continuing to comment on the Fed's actions, so things have gotten a lot more political than they've been for a long time. The Fed always seeks to be above politics, and I'm certain that they -- that their goal is to stay above politics. But that's not always possible, and it is a moment of interest in what the Fed's doing.

  • 10:16:48

    REHMAnd what about countries like Japan and Germany? How are they critical of what the Fed is doing?

  • 10:16:57

    MAGGSWell, as David and Zanny have said, there's a negotiation going on right now, and there are different factions. And the Chinese have exploited, I think, the relative weakness of the United States right now, the fact that there's a stalemate over most policymaking in Washington. And the Germans have also exploited the situation and chosen to try to vilify, I think, the action by the Federal Reserve that, as Zanny said, was intended to help the U.S. economy. It was really not intended to influence the value of the dollar.

  • 10:17:34

    MAGGSSo there is a kind of geopolitics going on, but -- you know, I think that there is an important political element to this at home here in that the president experienced, you know, terrible electoral drubbing. He left on this trip. He hoped, I think, to leave a lot of these problems behind. But I don't think it's a coincidence that there is kind of tumult and confusion over international economic coordination at the same moment that there's a perception that the U.S. president is at a weak point in his presidency.

  • 10:18:14

    REHMJohn Maggs, he is reporter for Politico. David Smick is editor of The International Economy magazine. Zanny Minton Beddoes is economics editor for The Economist. We will take a short break. When we come back, your phone calls, your e-mail. I look forward to hearing from you.

  • 10:20:02

    REHMAnd if you've just joined us, we are talking about the recent action by the Federal Reserve to put 600 more billion dollars into the economy, the world reaction to that action. And here in the studio, John Maggs, reporter for Politico, David Smick of The International Economy magazine, Zanny Minton Beddoes, economics editor for The Economist. You can join us, 800-433-8850.

  • 10:20:42

    REHMHere's an e-mail from Bob. He says, "Flooding the world economy with dollars barely qualifies as a Band-Aid and could never be deemed a long-term fix. In essence, it will only jack up current inflation rates, which are being grossly underreported by our Federal Reserve. If we want to compete against a world market, we must subsidize American manufacturing and place withdrawal from investing in foreign manufacturing markets on a timetable." What do you think of that, John Maggs?

  • 10:21:25

    MAGGSWell, I think most economists would say that subsidizing American industry and distorting the natural flow of trade is not going to help the United States in the long run. In essence, lowering the dollar does subsidize American manufacturers abroad -- perhaps that's what he was getting at -- but this administration has not worked very hard to open markets until now. One of the items on the agenda for this G-20 meeting that the president is going to be attending in Seoul is the proclamation of the completion of negotiations of a U.S.-South Korea free trade agreement -- marks quite a U-turn by the president on trade. And I think that it's made people who believe that free trade is good for the United States quite hopeful that this will be part of his policy for the next two years.

  • 10:22:21

    REHMZanny, there are a great many people who believe that the Fed's strategy could lead us into a much deeper and greater inflationary period. What's your thinking?

  • 10:22:36

    BEDDOESWell, I think in the long run, that's clearly a risk. But I think in the short run, the bigger risk is actually, still, uncomfortably low inflation or indeed deflation. And the best way of thinking about what the Fed is trying to do is as a kind of insurance policy to remove that possibility. I think the worst outcome for an economy like the U.S., which still has incredibly high debts, would be a deflation. And that's something we must absolutely avoid.

  • 10:23:02

    BEDDOESI don't think -- I don't worry about inflation very much in the next two, three, four years. I simply don't see how an economy which has almost 10 percent unemployment is going to have a kind of spiraling of prices and wages of the sort that we saw, say, in the 1970s when inflation was a really big problem. But I agree that in the longer term, when you look at the amount of borrowing that governments are doing across the rich world, that inflation is a risk.

  • 10:23:26


  • 10:23:27

    BEDDOESBut I am -- I actually have a lot of faith that this Federal Reserve is committed to low inflation and has the tools to pull back this liquidity that it is adding to the economy.

  • 10:23:36

    REHMJohn Maggs.

  • 10:23:37

    MAGGSI think one thing that we haven't been direct in commenting about is the reason the Fed has acted is they're quite worried about another recession. They're quite concerned about a double-dip recession. And let's focus on that for a second. The unemployment rate is 9.6 percent. There are a lot of problems in the economy. If we head down into another contraction in the economy, I think they are reasonably concerned that the effects could be really, really dire, things truly not seen in the United States since the 1930s.

  • 10:24:10

    REHMGive me an example of what you're talking about.

  • 10:24:12

    MAGGSWell, with the unemployment rate at such a high level, we risk creating an underclass of unemployable people who will lose their skills and will find it very difficult to transition back into the economy when it starts to recover.

  • 10:24:25

    REHMHaven't we already done that?

  • 10:24:27

    MAGGSWell, I -- it's arguable, but I think that the concern is that this would -- that we've seen underemployment and the number of people actually seeking jobs has hit 17 percent, something like that. It's higher than the -- what we count as the regular unemployment rate. And if that gets much, much higher, you're going to have a vast number of people who have been unemployed for a year or more. They lose their skills. They can't get going in this, you know, information age economy that we have. So I think that's what the Fed is concerned about. And balanced against that risk, the risk of inflation down the road doesn't seem so great.

  • 10:25:05

    REHMTell me what this infusion of $600 billion into the U.S. economy is likely to do, David.

  • 10:25:16

    SMICKWell, I think it's an interesting policy that Bernanke's put together. He's now got on the one side Paul Volcker and Joe Stiglitz on the left, dead set against the policy. On the right, he's got John Taylor and a bunch of other conservative economists, you know, dead set against the policy.

  • 10:25:36


  • 10:25:37

    SMICKThe U.S. monetary mechanism -- monetary policy, for instance, is not working. The Fed already has a trillion dollars of excess reserve. They got interest rates near zero percent, and it hasn't had the effect. It's a -- so you say...

  • 10:25:52

    REHMHasn't had the effect of?

  • 10:25:54

    SMICKOf an explosive -- certainly hasn't had the effect even on interest rates -- interest rates since the quantitative easing -- since the Fed moved interest rates to zero percent or near zero. Long rates have actually gone down, not up, which is very, very unusual. So you say, is Ben Bernanke insane? I mean, this is not a crazy man. So what Bernanke is doing, as far as I understand, is this is a bet that a double-dip, as John said, would be a disaster. It would be a disaster particularly for the Fed's independence, potentially. So they are looking at a potential wealth effect.

  • 10:26:33

    SMICKI don't think Bernanke has any expectations that this is going to be explosive. In fact, I think you can make a case. The worst thing that would happen to Bernanke would be that this has an explosive upward effect on the economy, and that sounds strange. It's totally counterintuitive. But if the economy takes off, you have $3 to $4 trillion in the bond market that's been -- that's jumped into the bond market because they saw the Fed's generous policies. And they will all head for the exit at the same time.

  • 10:27:06

    SMICKYou will see a massive jump in five-year treasury rates. And if that happens, that'll hit the stock market. It'll be a disaster. So Bernanke's counting, ironically, on the policy not working very well, but just enough that he gets what they call a wealth effect on the stock market, just enough to keep the economy from going into a recession. And so we can rebuild and do the fundamental things.

  • 10:27:31

    REHMZanny, you're frowning as David is speaking.

  • 10:27:36

    BEDDOESI'm always frowning. I think, you know -- I think just as if a patient is not responding to traditional forms of medicine...

  • 10:27:45

    REHMYou try something...

  • 10:27:46 try something experimental. It's very easy to cough at that and to say, it's not going to work for the following reasons, or it's incredibly dangerous for the following reasons.

  • 10:27:54

    REHMAs they did about acupuncture for years.

  • 10:27:57

    BEDDOESExactly. Well, that's interesting. We should test out to see what Ben Bernanke thinks about being compared to an acupuncturist. But I think you really do have to weigh out the costs and the benefits. And it is easy for commentators to focus a lot on the potential risks and costs. But if you are the policymaking institution that is really, frankly, the only institution in this town that is going to do anything very much in the foreseeable future, and you face the risk of potentially being held responsible by history for allowing the U.S. to fall into a double-dip or deflation, then you err on the side of activism, unless you think the costs of that activism outweigh the benefits. And I think the costs of QE, the potential costs, do not, in the short-term, outweigh the potential benefits.

  • 10:28:39


  • 10:28:40

    MAGGSLet me challenge that a little bit and just point out that this is an experiment, and it's a very, very large experiment. The Fed, which has not done anything like this, has already tripled its balance sheet -- in essence, its borrowings. It's going to add $600 billion more. When you ask about how it's going to recover this ground, the standard statement from Mr. Bernanke and the Fed is, well, when the economy is doing better, we will, in a kind of orderly way, sop up all this excess stimulus.

  • 10:29:17

    MAGGSWell, there's never been this amount of stimulus to sop up. And I think we have to look forward and say, it's going to be a very, very tricky period when the economy starts to recover. If it's a kind of -- if it's a weak recovery and inflation starts kicking up, will it be difficult to take that stimulus out of the economy? Will -- in fact, will taking that stimulus out of the economy put us back into a recession? It's a challenging job he has.

  • 10:29:45

    REHMDo you agree with David that we're likely to see this huge exit from the bond market as part of the way individuals react and move into the stock market?

  • 10:30:02

    MAGGSI'm going to defer to David on the financials. I'm not an expert on Wall Street and on finance.

  • 10:30:07


  • 10:30:08

    SMICKYou know, I think the -- Chairman Bernanke makes a good point. He is targeting an average of securities on the short end of the yield curve, which basically is a technical way of saying that if it doesn't go -- things don't go well, this stuff will mature relatively quickly in the next, you know, four or five years. So it's not like he's buying 30 years bonds. So from that standpoint, there's less risk. I guess my point is not that Bernanke shouldn't be doing this. My point is just, let's be realistic about what's going on. And let me take the -- if you have unemployment at near 10 percent, to bring the unemployment rate down to 5 percent, via monetary policy, most economists think you probably need another 400 basis points of interest rate cuts by the Fed. Now, you say, how can that happen?

  • 10:30:59

    REHMFour hundred basis point?

  • 10:31:00

    SMICKYeah, sure.

  • 10:31:01

    MAGGSFour percent.

  • 10:31:02

    SMICKIf you look -- yeah, 4 percent. So how do you do that when, you know, the...

  • 10:31:06

    REHMIt's in zero.

  • 10:31:07

    SMICK...when we're near zero? So the way, you know, the way you do that is quantitative easing. But to do the job of reaching for full employment, we would need another four to six trillion of quantitative easing. Just using the standard formulas of what it -- how much interest cuts traditionally have been necessary to affect the unemployment rate. That's absurd. So my point is simply, there's another reason why Bernanke is doing what he's doing. And it's a side bet. It's a bet that the stock market will take off. And why wouldn't it with all this liquidity? And it's enough just to kind of keep the economy going because stock investors tend to be more affluent. The more affluent are responsible for 50 percent of retail sales. There is...

  • 10:31:58

    REHMBut is that going to help?

  • 10:32:00

    SMICKBut there's another little angle here. If the -- if a policy has a weakening effect on the dollar, that will raise import prices. And the earlier comment about concerns with inflation going too low, well, I would submit, if the monetary function isn't working -- in other words, monetary policies pushing on the string -- the best way to get inflation up is a weaker dollar that raises import prices immediately. But anyway…

  • 10:32:27


  • 10:32:28

    BEDDOESWell, I think that's probably true, and I think that we need to -- we would be mistaken to think that this is a magic solution to what ails the U.S. It's clearly not. And there is no way that quantitative easing is going to bring the U.S. unemployment rate down to 5 percent. I think one -- second other question is, what are the other policies that we should be complementing this with right now? It is clearly a mistake to have the U.S. rely only on QE. And in an ideal world, you would be having much more aggressive policies to deal with foreclosures and negative equity in the housing market. You would have a complete overhaul of how to deal with unemployment.

  • 10:33:03

    REHMAnd you don't see that happening at all?

  • 10:33:05

    BEDDOESNo, I -- I mean, Diane, you know this city much better than I do. But I don't see any prospect for really big domestic policy initiatives in the next couple of years.

  • 10:33:12

    REHMJohn Maggs.

  • 10:33:13

    MAGGSYou know, it's -- certainly, there seems to be a stalemate over fiscal policy. And even if they're -- even if they were able to get together what is proclaimed to be a budget agreement about reducing the deficit, it would really have a miniscule effect.

  • 10:33:25

    REHMJohn Maggs, he is a reporter for Politico. You're listening to "The Diane Rehm Show." We're going to open the phones now, 800-433-8850. First to Birmingham, Ala. Good morning, Maurice.

  • 10:33:46

    MAURICEGood morning, Diane. My question -- I own a manufacturing company here in Alabama. And the problem that I see every day is competing against overseas because of the cost of labor. An example is that if I won't (word?) ME work done, mechanical engineering work done. I can hire an ME out of India who speaks excellent English for $5,000 a year. The cost of manufacturing labor in China is somewhere between 64 cents and $1 an hour. My FICA tax, my share of FICA tax that I pay on my lowest employee is more than that. Until we get jobs in the U.S., we're never going to solve this problem. What can we do?

  • 10:34:34


  • 10:34:36

    BEDDOESWell, that is the...

  • 10:34:37

    REHMThat's it.

  • 10:34:38 of the biggest problems facing the U.S.

  • 10:34:39


  • 10:35:03

    BEDDOESBut I think the answer -- the glib-sounding but, I think, very real answer is that you basically -- the U.S. economy has comparative advantages in higher skill jobs. You don't solve this by putting up trade barriers to try and prevent competition coming in from other countries. But I think -- and you -- the caller mentioned tax policy. I mean, I think there are policy improvements that you can do that assist U.S. businesses.

  • 10:35:06

    REHMBut you don't see that happening in this lame duck session.

  • 10:35:09

    BEDDOESYou know, certainly, in order in the lame suck session. In my kind of wildest dreams, I think, well, maybe the U.S. will use the next couple of years to come to some big medium-term fiscal reform that would, you know, sort out the big deficits that we face in the medium term. We'd have fundamental tax reform which would improve that tax code, make it more efficient, more pro-growth. That would be a fantastic improvement to the U.S. economy.

  • 10:35:31

    REHMBut in the short run, how does President Obama present this at the G-20?

  • 10:35:40

    MAGGSThe situation that we face?

  • 10:35:42

    REHMThe current situation.

  • 10:35:44

    MAGGSWell, he's making the case for international unity, to try to force adjustments in China's huge surplus. And I think that, as we've talked about, that's in somewhat in disarray right now, but I think that -- you know, getting back to what Zanny was saying, Obama needs to be thinking about the U.S. economy. That's his -- that's why he wants China to correct its imbalances. And he needs to be looking down the road also to his own reelection. What are his policies going to be?

  • 10:36:18

    MAGGSThat's an interesting question. I think that budget deal will certainly help. It will send the right message to businesses that the economy -- that government in Washington is getting serious about the deficit. And that would hopefully unleash all of the money that businesses have been sitting on, waiting to invest, and that will create jobs. I think that's the equation.

  • 10:36:36

    REHMHow likely is China to react in a way that helps this problem?

  • 10:36:44

    SMICKWell, I think the Chinese will react, but not with a grand announcement that look -- that makes it look like the U.S. has achieved a victory. They'll have these silent, little baby steps. And some time next spring, we'd probably wake up and say, oh, yeah, the currency moved more than we thought. But let me go back to the caller. The caller makes an interesting point. It's very dangerous if President Obama presents currency depreciation as a magic pill. Let's assume the Chinese today said, we'll depreciate our currency 20 percent. So in auto work, instead of making $2 an hour, we'll make $2.40. Today, in the U.S., an auto maker -- auto worker makes $29 an hour. So there's not going to be, you know, a dramatic result. It's -- China should play by the rules, but let's not sell this as a magic pill.

  • 10:37:36

    REHMAll right. Short break, and when we come back, more of your calls.

  • 10:40:02

    REHMWelcome back. We'll go right back to the phones as we talk about the attempts to balance the world economy. Let's go to Watertown, N.Y. Good morning, Patrick. You're on the air.

  • 10:40:18

    PATRICKGood morning, Diane. Too bad you couldn't get John Taylor, Niall Ferguson and Nouriel Roubini on your program at some point, too. I think they could open some eyes. But other than that, I did want to ask the fellow who said that Germany and Japan appeared to be using us as a geopolitical tool. It almost, to me, insinuating that somehow Germany and Japan are opposed to the U.S. because of political reasons. I remember in 2005 at the meeting of the G-7 in Heiligendamm in Northern Germany, the Germans were urging the Americans to, please, do something about your derivatives and the bundling of all this money that you're sending around the world.

  • 10:41:16

    REHMAll right. Patrick, let's talk about Germany first. David Smick.

  • 10:41:23

    SMICKWell, the Germans find themselves in an interesting position. The Chinese, in particular, have been able to peel them off from -- Germans and the little pilot fish around them. In the northern part of Europe, they've been able to peel them off from the rest of the euro zone. The Germans have enormous confidence in their export sector, which is politically powerful in Germany. They feel they can handle any exchange rate you give them. And what they don't -- what they have, though, is an aging population.

  • 10:41:51

    SMICKAnd they have weak domestic demand, and they're unwilling to stimulate their domestic economy. The Chinese have come to the rescue. They have -- if you look at German's trade account, the Chinese and other emerging markets are buying, you know, sophisticated German automobiles and machine tool equipment. It is an explosion of purchases. China, for -- runs a deficit with Germany.

  • 10:42:20


  • 10:42:21

    SMICKAnd it runs a pretty significant surplus with the rest of the Euro zone. So it's a very clever policy on their part. And the Germans have been able to get away with it. I -- if -- I can't imagine these weak sisters within the euro zone, why they don't scream about. Look, we can't tolerate a -- you know, a stronger currency.

  • 10:42:38


  • 10:42:39

    BEDDOESI think the interesting think is that Germany wants to keep up the fire on the U.S. because Germany is in the same position within Europe as China is vis-à-vis the world economy...

  • 10:42:49


  • 10:42:49 the sense that Germany's surplus is bigger as a share of its economy than China's. And if you look, the Euro zone as a whole, the single currency actually runs a small deficit. But within it, Germany runs a huge, huge great surplus. And, as David said, what is good for Germany is terrible for the other weaker members of the euro zone. And Germany is kind of dominating the debate within Europe on the future of the euro zone.

  • 10:43:11

    BEDDOESAnd it's -- it certainly doesn't want an international debate that targets surplus countries because it would then be in the dark. Whereas if it can turn around and say, the U.S. is being profligate, the U.S. is being clueless -- as I think Wolfgang Schaeuble said this week -- you know, if it keeps the focus on the inadequacies of the U.S., then it means that the debate doesn't turn to where the U.S. wants it to be, which is on surplus economies, like China and like Germany.

  • 10:43:37

    MAGGSThere's some backstory to the conflict between the U.S. and Germany. And that is since the beginning of the financial crisis, the two have not been -- not looked at the cures for the global financial crisis the same way. The Germans have resisted the level of stimulus that the United States has called for internationally. The U.S. has been quite critical of Germany. There's some payback involved, I think, in what's going on this week. And it really continues.

  • 10:44:03

    MAGGSThe United States feels that much more stimulus is needed. The Germans have a longstanding policy against that. They're quite allergic to the idea of inflation, and they feel that -- so -- and this -- I think that this conflict is going to continue and that the Obama administration remains committed to this idea that more stimulus is needed. I'm not sure how much they'll be doing at the level of fiscal policy, as opposed to what the Fed is doing, but the Germans are in conflict with the United States.

  • 10:44:36

    REHMAll right. To Philadelphia. Good morning, John.

  • 10:44:41


  • 10:44:43

    REHMHi. Go right ahead.

  • 10:44:44

    JOHNYeah, I have two comments basically -- comments, slash, questions. And the first being, when we talk about job growth, you know, over the last -- over this past election, but for the better part of the last year, all this talk about job growth. We need jobs. And it's my understanding that, unless we really have this rebalancing of the global economy, we really can't get good solid job growth here, meaning getting that export economy going. And the question is, do you think the politicians really have an understanding of what needs to happen? It seems like what Bernanke is doing is very logical when trying to spur this job growth that we need.

  • 10:45:25


  • 10:45:27

    BEDDOESWell, I would agree with that. I think that -- certainly with the idea that job growth -- that the politicians need to focus on job growth. But I think that rebalancing is an important part of the solution, but it is not going to be the main part of the solution to job growth in the U.S. And the export sector is still a relatively small part of the U.S. economy. So it's -- getting the U.S. economy going again means -- and getting demand going, get persuading firms to invest more and create more jobs -- demands a whole series of actions, not just on the dollar.

  • 10:45:58

    MAGGSExports are a small part of the economy. But, of course, a change in the value of the dollar would help stimulate domestic manufacturing in competition with exports. But that is still a relatively small volume.

  • 10:46:09

    REHMBut I think the caller's question focuses on politicians and whether they truly understand the need for what's happening here, David.

  • 10:46:21

    SMICKWell, when you come to -- I agree with the notion that exports are 10, 11 percent of our GDP. For most of the world, that's over 40 percent of their GDP. Our concern -- exports are important, but we have to be concerned with what's happening here. The -- Washington, on the jobs issue reminds me of -- you know, you're walking down the road late at night, and you look down this dark alley. And you see, you know, Uncle Sam in front of a lamppost. That's the only light, and he's on his hands and knees, and you -- looking for something.

  • 10:46:54

    SMICKAnd you go over, and you say, what are you looking for? He said, well, I left my car keys here. And you say, well, let me help. And then you say, by the way, where was the last place that you saw them? And he said, over in that dark corner. Well, why are you looking here? 'Cause this is where the light is. Washington approached jobs by concentrating on the people who are least involved in creating jobs -- large companies. Why? Because they are the ones that have the presence in Washington. If you look at the net new job growth...

  • 10:47:22

    SMICKYou're talking about the lobbyists.

  • 10:47:25

    SMICKThe lobbyists. Eighty percent quibble about the figures. It's 70, 80, 90 -- 85 percent, but the vast majority of net new jobs come from, not only small companies but new companies. Washington doesn't know who these people are. (unintelligible) by definition, they -- and so, if we're going to -- if Obama is going to turn around the job situation, he needs to become the innovation president. He has no choice but to say, I've got to figure out how I can encourage people to take risks right now in the economy.

  • 10:47:56

    BEDDOESI agree with that. I just wanted to get back to a comment that John made earlier about how the Germans and the U.S. politicians view things differently. And I think they particularly view this, what is the role of policy to boost economies and to boost job growths very differently. And to caricature only a bit, I think here in the U.S., the basic view is that this is all a very nasty recession and its aftermath. It's all cyclical as economists put it. So if you boost spending, whether it's fiscal spending or whether it's monetary, that is the main route to getting jobs back.

  • 10:48:26

    BEDDOESIf you're in Europe, they think exactly the opposite. They think that too much loose policy is what got us into this mess, and it's all about structural reforms. The Europeans believe a lot in structure. They want to have structure reforms to improve an economy's competitiveness, and I suspect the truth is somewhere in the middle. We need some of both kinds of policies -- more focus on structure than we have here in the U.S., but still some monetary and fiscal policies, too.

  • 10:48:50

    REHMHere is an e-mail from Steven. He's in Norman, Okla. "Please comment on the timing of the Fed's announcement after the midterm elections. The policy attempts to address -- conditions didn't just creep up on us. A stagnant economy, high unemployment, et cetera, it seems Ben Bernanke may not have wanted to be perceived as helping Democrats by pumping up the economy." John Maggs.

  • 10:49:27

    MAGGSWell, I don't think that there was an effort to favor Democrats or Republicans. The truth is that the decision to do this stimulus was made in August. It was announced in August. The actual terms were not announced at the time, but the -- it was obvious that the Federal Reserve itself had made the decision to do this, that it needed to do this. So it shouldn't have been a surprise in that sense. It was scheduled for a regular meeting of the Federal Reserve's policymaking apparatus right after the election. I think, certainly, they thought, let's not do this before the election 'cause if it gooses the stock market, it might make it look like we're trying to help Democrats.

  • 10:50:09

    REHMYeah, this is interesting. In reference to what President Obama is saying, how is it possible to say that we, the U.S., are for free trade, while at the same time devaluing your currency, which is the first tool to use in a trade war? It's a basic contradiction, that printing of dollars is a devaluation. Zanny?

  • 10:50:41

    BEDDOESWell, I don't really agree with that. I think that it comes down to, what is the motive? And the motive of what the Federal Reserve is doing is not to devalue the dollar. And if you think of what quantitative easing as essentially an extension of ordinary monetary policy -- an ordinary monetary policy is raising or lowering short-term interest rates. Now, they have to do this thing called QE because short-term interest rates are at zero, but they're basically -- it's the same kind of process.

  • 10:51:06

    BEDDOESAnd if the Fed reduced interest rates in a normal recession or a normal weak economy, no one would be going around, saying, they're playing currency wars, they're trying to manipulate the currency. It's very, very different to say what the Chinese are doing, which is intervening in currency markets to buy dollars to keep their currency down. That's not what the Fed is doing.

  • 10:51:24


  • 10:51:25

    SMICKYeah, by that definition, you know, the Fed can never ease because they'd always -- that would be interpreted as an attempt to drive the currency down. I think this is a very interesting period in the global economy. We're now in a situation where no one wants to be a buyer of the world's stuff. Everybody wants to be an exporter. And the danger is that, unlike in the past, there was a risk in driving your currency down. And the risk was that your long-term interest rates would go up because of the fear of rising import prices.

  • 10:51:59

    SMICKWith global deflation or deflationary pressures, that's not a risk anymore. And it seems like we have a world now -- everybody wants a weakening currency. Everybody wants to be an exporter. And probably a large part of this is that so many parts of the world -- so many of the characters in this drama -- have demographics that are troubling, aging societies. And they don't have confidence that they can ever stimulate their domestic economies enough. Their -- as their populations, particularly in Germany and China, get older, you know, they save more. And so you -- this is -- you know, at some point, somebody's got to be willing to step forward and say, we are the consumer. The U.S. has been that. Look where it got us, so -- and that's what's the most troubling thing to me about the global system right now.

  • 10:52:45

    REHMAnd you're listening to "The Diane Rehm Show." John Maggs.

  • 10:52:50

    MAGGSI mean, I think that what David said gets back at a criticism of the United States, that it has allowed its budget deficits and its long-term budget problems to get out of control. And when you say that, you know, everyone's in a -- everyone wants to be an exporter, it -- they look at the United States and its desire to recover and to build back its economy on exports as, you know, the United States essentially being greedy and saying, you have screwed up your economy by borrowing and borrowing and borrowing. And now you want to come back, you know, but on our backs essentially. You want to make a recovery on the backs of the rest of the world's economies, and they're impatient about that. They want...

  • 10:53:35

    REHMHow about India? What is India feeling?

  • 10:53:39

    BEDDOESIndia is our new best friend.

  • 10:53:40


  • 10:53:41

    BEDDOESIndia is actually the good guy in all of this. India does not run a very -- does not run a surplus actually, unlike China. India is doing exactly what emerging economies ought to do. It's investing a lot. It's importing capital. It's growing fast. Money is flowing into India. It is not trying to keep its exchange rate artificially cheap. It is not trying to build an export-like growth model. The growth in India is coming domestically. It's domestic investment, domestic spending.

  • 10:54:05

    BEDDOESI think if you want look at an economy that is a kind of -- you know, a paradigm for the kind of growth that you want in the emerging world, I would say it's India. And I think India is, frankly, playing a very responsible role right now in this global debate. And, you know, it may be because President Obama was there, and you don't want to be, you know, rude to your guest. But I think what the Indians said about that G-20 and their kind of (sounds like) common words were exactly where one would hope everyone else would get to.

  • 10:54:28

    REHMSo, in the end, what do you see as the impact, the effect of the Fed putting the $6 billion back into the U.S. economy, David?

  • 10:54:42

    SMICKWell, it's -- I think the effect is behind the scenes. The emerging -- the non-Chinese emerging markets, which includes India and Brazil, are now saying behind the scenes, hey, we played by the rules, China doesn't. And it has created a lot pressure suddenly on the Chinese. And these countries are saying, if we don't play it by the rules, then we're going to use tax gimmicks and everything else to prop up our exports. But this is not the way the G-20 should run. So, you know, one of the unintended -- or maybe it was intended-- but one -- I would suspect unintended consequences of this quantitative easing by the Fed, which creates the fear of dollar weakening, is that it's kind of made the debate at the G-20 less a U.S.-China debate and more of a global debate.

  • 10:55:28

    REHMInteresting. John.

  • 10:55:29

    MAGGSI think that the other thing that's interesting about this moment is it's the kind of moment that calls for U.S. leadership -- at least it has in the past, lots of disputes and squabbles among different rising nations around the world. And the open question, I think, is whether President Obama is going to be able to provide that leadership with all of the domestic political problems that he has focusing on, you know, righting his own administration, coming back, putting himself in position for reelection, a lot of demand for U.S. leadership. And it's not clear -- based on the scene that we've seen this week -- that he's ready to provide it.

  • 10:56:05


  • 10:56:06

    BEDDOESI think it will be widely criticized. I think it will never get the credit that it probably deserves for preventing things from getting much worse. But I think history will go back and will judge limited quantitative easing to have been a sensible thing to do, given all the other constraints going on.

  • 10:56:22

    REHMZanny Minton Beddoes, she is economics editor at The Economist, David Smick, he's editor of The International Economy magazine, author of the book "The World Is Curved," and John Maggs, reporter for Politico. Thank you all so much.

  • 10:56:43

    SMICKThank you.

  • 10:56:44

    BEDDOESThank you.

  • 10:56:44

    REHMThanks for listening. I'm Diane Rehm.

  • 10:56:46

    ANNOUNCER"The Diane Rehm Show" is produced by Sandra Pinkard, Nancy Robertson, Susan Nabors, Denise Couture and Monique Nazareth. The engineer is Tobey Schreiner. Dorie Anisman answers the phones. Visit for audio archives, transcripts, podcasts and CD sales. Call 202-885-1200 for more information. Our e-mail address is And we're on Facebook and Twitter. This program comes to you from American University in Washington. This is NPR.

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