Federal Reserve’s gusher of dollars is starting to cause serious consequences for the rest of the world. It is especially evident in Asia where Obama is currently getting an earful from Asian leaders about what the US dollar is doing to their economies. Many Asian counries are getting a huge liquidity kick, where people borrow the US dollars at low US interest rates and then invest them somewhere else for higher returns.

Consequently, Asia’s stock markets are overruning US and European stock exchange. Shanghai is up nearly 80% this year-to-date. Hong Kong property is rising high with a recent apartment sale at $57 million. More and more enthusiastic investors are turning back to what they now call as the “new China” – Indonesia.

Asian leaders are concerned about the loose US monetary policy. Currently the US dollar is flowing to Asia and that is where the problem is going to be. Former Finance Minister of Hong Kong, Donald Tsang said, “You can see asset prices going up, not only in Korea, in Taiwan, in Singapore and in Hong Kong, going up to levels that are incompatible or inconsistent with the economic fundamentals.” The risk of this is more asset bubbles and misallocation of global capital.

In the meantime, Treasury Secretary Tim Geithner is using George W. Bush’s mantra to call for a “strong dollar” but also for “market-oriented exchange rate”. This has come to be understood as a special code by the Treasury department to keep the dollar weak. Geithner’s message was reinforced by President Obama as he called for “balanced trade” which is a suggestion to keep a weak greenback in order to spur US exports. Consequently, the cost of gold hit an all-time high as a response. According to Currency Street, gold shot up $24 and topped up at $1,142 per oz.

This is seen as a dangerous game that would lead to some serious economic policy mistakes. The world may conclude that the US is trying to devalue the US dollar in order to increase exports and thus steal demand from the rest of the world. China is getting more and more nervous as it is currently facing easy flow of US dollars and may be forced to revalue their yuan in order to avoid importing dollar inflation.

The US may adopt John Connally’s view and say that “none of this is our problem” but the asset bubbles that are building up in Asia and may burst anytime soon will eventually cause trouble in the US itself. This is what happeend in the Asian monetary crisis in 1997.

As Hong Kong pleads Obama not to “blow our bubbles”, Obama is making a big mistake by believing that any nation can devalue their way out of the crisis into prosperity.  Currently other currencies rise in value and countries force more productivity gains but by using this dangerous game, Obama makes the US economy way less efficient. Hence, in the end American living standards will decline and those in Asia will rise. This lesson should be learned from the Connally-Nixon devaluations of the 1970′s along with the inflation that followed. Moreover, Chinese leaders are considering whether the US is really deliberately squeezing their currency to devalue away their rising debt burden. If they decide that the US is doing so, they may find ways to return the offense – probably on Iran or North Korea.

The current Asian angst is about the monetary policy by the US Federal Reserve which is run not only for the US but for an entire dollar bloc. Obama and the Fed is requested to run a more cautious monetary policy with fewer economic distortion and financial risks.

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