T ime magazine called her the "sixteen trillion dollar woman", but as recent events have shown, she might more correctly be called the " eighty-eight trillion dollar woman", that being a rough calculation of the value of total gross world product, the annual value of goods and services produced worldwide, on a purchasing power parity basis. The question of the hour for Janet Yellen, who took over this week from Ben Bernanke as the head of the US Federal Reserve System, the first woman to lead it in its 100-year history, is whether she will accept that she has a responsibility to the global economy as well as to the United States. The potential tragedy for the world - and ultimately for the US itself - is that she will follow her predecessors and those constitutional experts who say that the duty of the Fed is to look narrowly to the US and the twin preoccupations enjoined on it of keeping inflation in check and promoting employment in the US - and the rest of the world can go hang. But the "realeconomik", as seen in the financial markets in the past few weeks, is that we live in a globalising world. The US, like imperial powers before it, likes to have everything its own way: it claims global sway without taking responsibility for its action; when it does something for its own benefit, it pretends that its actions have no consequences on the rest of the world, or that it is their own fault if they are caught in the backwash. But the US is also part of the globalising world, and the damage its policies do to others will come back to hurt it, too. Yellen and the Fed, if they have any sense, will build the world into their economic models. This has been seen in the past few weeks as the US has begun to "taper" or reduce the massive programme of quantitative easing, amounting to US$85 billion a month being pumped into the economy, a flood of money intended to encourage economic growth and create new jobs. To what extent it has done so in the US is a matter of argument, with a growing chorus of critics complaining that it has merely boosted asset prices and the stock market to the great speculative benefit of the mega rich. The US quantitative easing, supported by similar easing in Japan and Britain, has certainly boosted stock markets. But it also encouraged money to flow to emerging markets. American tapering has made investors jittery and they are pulling back, especially from emerging markets, with devastating effect. The first wave hit last year when Bernanke first talked of tapering and emerging markets suffered when money was pulled back. As the Fed began its tapering last month, and cut back the monthly drug infusion from US$85 billion to a mere US$75 billion a month, more than US$6.3 billion was pulled out of leading emerging markets in a week. Brazil, India, South Africa and Turkey all felt the pain. Turkey raised its weekly benchmark rate from 4.5 to 10 per cent, but after a few hours of relief, emerging markets' currencies came under renewed pressure. Nervous contagion then spread back to the developed markets, and stocks in the US, Britain, Europe and Japan all posted sharp losses for January, the first time it has happened since 2010. The investment bank Goldman Sachs produced a note claiming that the impact of a shock to emerging markets should have limited effect on the economies of rich countries. Yet there is always the risk of financial panic spreading like wildfire and burning the industrialised world on its way. India's central bank governor Raghuram Rajan recognises that there is blame to be shared all round. Interviewed by Bloomberg, he claimed that emerging markets were hurt by the "easy money which flowed into their economies and made it easier to forget about the necessary reforms … that had to be taken". The US and other industrialised countries went their own way with quantitative easing. Now they cannot understand why developing countries are complaining about the taper. Rajan has the answer: "We complain for the same reason when it goes out as when it went in: it distorts our economies, and the money coming in made it more difficult for us to do the adjustment we need for sustainable growth and to prepare for the money going out … "International monetary co-operation has broken down. Industrial countries have to play a part in restoring that, and they can't at this point wash their hands and say, 'we'll do what we need to and you do the adjustment'." Enter the US$88 trillion woman. Will she make a difference? We wait to see whether she has any inkling of the international pain that American policies are causing and whether she has any idea how to start a dialogue with Rajan and others. In a globalising world, even the US must think of global solutions. Kevin Rafferty is a professor at the Institute for Academic Initiatives, Osaka University
