There is continual talk that, if not in the short run, at least in the longer run, foreign central banks, especially the European Central Bank, should cut interest rates. My question right now is “Why should they?” They have played by the rules. The United States hasn’t. For the past seven years, the United States government has gone it alone…in foreign policy…and in economic policy. It is not in the interest of other central banks to ease up on the disciplined monetary policy they have worked so hard to establish. There is also some resentment they must get over caused by the ‘go-it-alone’ policies of the United States.
Since 2001 the value of the dollar has declined against the Euro by more than 7% per year. This certainly should have been a signal to the US that the rest of the world thought something was wrong with its economic policy. But, the Bush Administration did nothing about it. Now, the chips associated with globalization and the absence of an energy policy are coming home. The rest of the world is strong enough economically and financially that the United States cannot act independently anymore.
The current activity is exactly why world markets react against the monetary and fiscal policies of a country that are not sound and disciplined and sell that country’s currency. Sooner or later that country is going to have to monetize more and more of its outstanding debt. That is what the Bush Administration is now doing. No wonder the value of the dollar continues to decline and the price of gold rises along with the price of oil. The United States is paying for its lack of discipline. However, the rest of the world is also concerned about the price it will pay for the past behavior of the United States.