America's easy money has also spilled beyond its borders in a second way. When central banks buy American Treasury bonds, adding to their foreign-exchange reserves, to try to hold down their currencies against the dollar, they print local money. This amplifies the Fed's lax stance. Last year, the global supply of dollars (the sum of America's monetary base plus global foreign-exchange reserves) rose by a whopping 25%. After adjusting for inflation, this is close to the fastest pace in the past three decades.
Worse still, the effects of greater global liquidity then flow back into America's economy. By buying huge amounts of American securities to prevent their currencies rising, Asian central banks depress American bond yields, lowering borrowing costs for home buyers and companies. By some estimates, Asian purchases of American bonds have reduced yields by between half and one percentage-point."
Are foreign central banks essentially printing money to buy Treasuries? (That would indeed be inflationary.) Or, are they issuing local-currency denominated bonds to raise money with which they buy US bonds ("sterilizing")? In the latter case there is no inflationary effect but there is an FX mismatch between assets and liabilities of the central bank that will hurt them if the dollar falls in value.
