Both China and US cheating?

Both QE and currency devaluation are unconventional economic policies and may be regarded as cheating a country's way into economic stability. However, when a country runs out of the traditional tools of stimulating the economy as is the case for the US, infrequent enlistment of QE is arguably the way to go. I will be keen to see the shape this debate takes as the Chinese President Hu Jintao makes his trip to the US later this week. The media is already stirring this debate up.

Expansionary monetary policy, at least from an economics textbook, is perfectly legal. It is used to stimulate the economy by lowering interest rates and eventually increasing aggregate demand. But with interest rates at near zero level, traditional monetary expansion becomes ineffective.

Unable to employ expansionary monetary policy for the reason stated above, Ben Bernanke and his friends at the Fed in November last year decided to go for the lesser conventional expansionary policy known as Quantitative Easing (QE). In a layman's terms, QE is when the Fed (central banks) prints money and uses the money to buy up government debt (bonds). It is used to stimulate the economy by increasing money supply, which leads to lower interest rates etc. (There is a fine line between QE and printing money Zimbabwe-style, also known as 'monetizing' government debt. Check this difference out.)

Currency devaluation policy is traditionally frowned upon especially if it significantly affects competitiveness of goods in favor of the devaluing country on the world market. China has notoriously pursued the policy despite sustained pressure from the US to let Renminbi appreciate to its real market value. 

China is not the only one, though. Many other countries have (or still do) manipulated  their currencies. Classic examples include Japan in the 80s, Brazil in the 90s, Argentina, Thailand in late 90s (of course this triggered the East Asian financial crisis of 1998, also known by some as the Asian Contagion). Similarly, several countries have carried out QE in the recent past, most notably Japan in the 90s, the UK and Eurozone countries in 2008.