Across the world, world leaders have been jaw jawing. Well, as they say, it is better to jaw jaw than war war. This week may yet see the most important G20 summit yet. And world leaders are trying to lay down their markers.

Barack Obama has come out to support Ben Bernanke, saying during his trip to India: “The Fed’s mandate, my mandate, is to grow our economy. And that’s not just good for the United States, that’s good for the world as a whole … The worst thing that could happen to the world economy, not just ours, is if we end up being stuck with no growth or very limited growth.”

But Germany is not so convinced. Angela Merkel said in the FT yesterday: “The greatest danger that threatens us is protectionism, and we are still not taking enough steps to ensure genuinely free trade.”

Last week, Wolfgang Schäuble, Germany’s finance minister, described the latest bout of QE from the Fed as “clueless” and “hopeless”.

Yesterday, the Chinese finance vice-minister Zhu Guangyao said: “As a major reserve currency issuer, for the United States to launch a second round of quantitative easing at this time, we feel that it did not recognise its responsibility to stabilise global markets and did not think about the impact of excessive liquidity on emerging markets.”

But maybe something else is going on.

The US is playing hardball by introducing a policy the rest of the world hates. But the US wants to end global imbalances. If we are in the midst of a global currency war, then QE is the only weapon of mass destruction available. President Kennedy stood up to the Soviets over the Cuban Missile crisis, and history remembers him well.

When you have WMDs, you are in a position of strength. And right now, on the eve of the big G20 summit, world leaders are jockeying for position, and QE is Uncle Sam’s trump card.
But to find out why this is so important, see today’s lead article: IMF, G20 and treaty to end the currency war.

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