Comparing the Monetary Policies of the United States and China

Introduction

The substantial growth of China, from a stagnant non-performing nation to an economic giant in a time span of just twenty eight years, has been undoubtedly phenomenal. It has proved the general observation wrong, that no country that once declined would rise again. China has emerged as the most powerful economy of the twenty-first century; in fact the second-largest of the world. This success had not been achieved overnight. China had faced its share of extreme social and political pressures and problems, and after going through decades of misery, it has finally emerged to be an influential country; one that is being compared to even the giant super power- the United States. Now the growth is reaching an enormous extent and China is all set to substitute the U.S. as the driver of global economy.

While the US has been growing as the world's largest deficit burden, China has been running with the world's greatest budget surplus. This has posed some potentially serious threats to the U.S. economy, to say the least. It is about time the U.S. not be ignorant of the Chinese intentions and revise policies for future course of action. Unless the U.S. make provisions of sustainment and respond to the Chinese overpowering in a timely fashion, it could not save itself from the threats that are expected to victimize the U.S economy and shift the power onto China. This could mean a change in the face of global economic structure where China would reign supreme (William, pp 97).

Discussion

Comparison of the monetary policies of U.S. and China

The macroeconomic policy response to this recession was unprecedented in its size and scope. Monetary policy in 2008, under Chairman Bernanke, was the most expansionary since World War II (WWII). The Fed's emphasis remained on the stability of the banking sector and to a lesser extent on inflationary concerns as total spending in the economy declined. As with Japan during the 1990s, concern was express over the appearance of deflation further reducing Fed worries over inflation. The Fed even allowed short-term borrowing by financial institutions that were able to use some higher grade MBS as collateral and finally agreed to purchase some MBS itself. All through 2008, the Fed kept creating new auctions and programs of providing credit to the economy. The Fed also pursued traditional easy monetary programs. At the end of 2007, the Fed funds rate was 4.25%. By the end of 2008, it was 0% (officially a range of 0% to 0.25%)(Turley, pp 12).The immediate question this zero-interest rate policy posed was, had the United States run out of monetary policy options just as the NBER announced a recession had started in December 2007? Certainly fiscal policy could be use to stimulate spending, but had monetary policy run aground? While the Fed was lowering the nominal fed funds rate to zero, it simultaneously pursued a program of “quantitative” monetary ease.

As a whole the impact of monetary policy in a ...