Hooliganism? Hardly.

Last Updated Apr 20, 2011 4:47 PM EDT

Vladimir Putin is critical of monetary policymakers in the US:
Putin: U.S. Monetary Policy Is 'Hooliganism', WSJ: Russian Prime Minister Vladimir Putin slammed expansionary U.S. monetary policy, calling it "hooliganism", in remarks that followed more veiled criticism from China after Standard & Poor's Corp. cut the outlook on its U.S. debt rating this week. ...
"Look at their trade balance, their debt, and budget. They turn on the printing press and flood the entire dollar zone -- in other words, the whole world -- with government bonds. There is no way we will act this way anytime soon. We don't have the luxury of such hooliganism," he said. ...
I suppose this can be explained by something like "the best defense is a good offense," but the fundamental problem is not the behavior of monetary policymakers in the US. First, although I disagree that monetary policy is responsible for the run-up in commodity prices, e.g. see this argument from the SF Fed, if it is true Russia benefits from this. Russia is a resource exporting country and when commodity prices rise, it does better. Again, I don't think there's any basis to do so, but if they object to selling their commodities at higher prices, I don't think anyone would mind if they reduced the price.

The real issue is that, as noted in the article linked above, "Russia has the world's third-largest international reserves after China and Japan." Policymakers in Russia are worried about inflation in the US eroding the value of these reserve holdings. But why does Russia have so many reserves to begin with? It comes from a trade surplus, one that -- like the surplus in China -- can be alleviated by allowing its currency to appreciate on foreign exchange markets (that would also help with inflation in both countries). The US cannot reduce its trade deficit unless other countries are willing to reduce their surpluses. That is, unless it is willing to undergo deflation -- another way to allow foreign currencies to appreciate against the dollar. But policymakers in the US are not going to allow that to happen since it could lead to a deflationary spiral.

I can't blame Putin for trying to force all the adjustment on the US, or as much as possible anyway. Or China. But both countries -- by taking the steps necessary to reduce their trade surpluses -- are in the best position to address the concerns they've expressed.