These issues have several immediate implications. Policy makers are just now starting to recognize that much past and current unemployment was and is structural unemployment: lost jobs that will never return, as opposed to lost jobs that will return when the economy recovers. Structural unemployment is the hardest type for government to address, but maybe now there will be meaningful programs to combat it.

Against the backdrop of the recent U.S. midterm elections, we can expect the current Fed Chairwoman, Janet Yellen, to be criticized much more than her predecessor, Ben Bernanke, for stagnant wages. This is because Ben Bernanke was originally nominated by a Republican president and subsequently renominated by a Democratic president. Janet Yellen is President Obama’s Fedchair, and the Republican-controlled House and Senate will not let the public forget it.

The truth is that monetary policy tools such as quantitative easing were not always the right tools for the task of fixing the damage caused by the financial crisis. So why were they relied upon so heavily? It is probably because monetary policy is not a legislative process, whereas fiscal policy is. QE2 and QE3, as monetary policies, were the easiest way to try to deal with a crippled economy in a contentious political environment.

As QE3 ends, bond prices will be sure to fall, causing yields to rise. These increases will ripple throughout the rest of the U.S. economy, probably sooner rather than later. It is anyone’s guess as to how higher interest rates will affect consumer spending, the housing market or business expansion.

The end of QE3 affects China, too. China holds roughly $4 trillion in excess foreign reserves, primarily in U.S. dollar denominated securities. The value of these U.S. securities will surely fall. If China elects to liquidate these holdings before they mature, China will lose some of its present wealth. Otherwise, there will only be “paper” losses. However, the good news is that the U.S. dollar is strengthening against almost all foreign currencies, partly because of prospects for higher future interest rates in the U.S., which China can enjoy when it reinvests its interest income and rolls over its U.S. securities.

China will therefore have more purchasing power in markets where U.S. dollars are required, such as world oil markets. China’s exports will also look more attractive to U.S. consumers, allowing China’s domestic industries to shore up their growth. Thus, the end of U.S. quantitative easing has many far-reaching implications that are international in scope.

The author is a columnist with China.org.cn. For more information please visit:

http://www.ccgp-fushun.com/opinion/tylorclaggett.htm

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