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Despite this heady start toward global rebalancing and President Obama’s personal buy-in, two G20 summits came and went in 2010 with no significant progress in the commitments of member nations to the Pittsburgh summit goals. The IMF did conduct extensive reviews of the practices of each country under the heading “mutual assessment” and continued allegiance to the framework was paid in the G20 communiqués, but the ambitious goals of rebalancing were essentially ignored, especially by China.

Geithner was blunt in criticizing the Chinese for not allowing greater yuan revaluation. When asked by the Wall Street Journal in September 2010 if the Chinese had done enough, he said, “Of course not . . . they’ve done very, very little.” U.S. exports did improve in 2010, but this was mostly because of relatively high growth in emerging markets and a demand for U.S. high-tech products rather than exchange rate changes. The Chinese did allow the yuan to appreciate slightly, mostly to forestall China being branded a currency manipulator by the U.S. Treasury, which could lead to trade sanctions by the U.S. Congress. But neither of these developments came close to meeting Geithner’s demands. Even a bilateral summit in January 2011 between President Hu and President Obama, the so-called G2, produced little more than mutually cordial remarks and smiling photo ops. It seemed that if the United States wanted a cheaper dollar it would have to act on its own to get it. Reliance by the world on the G20 had so far proved a dead end.

By June 2011, however, the United States was emerging as a winner in the currency war. Like winners in many wars throughout history, the United States had a secret weapon. That financial weapon was what went by the ungainly name “quantitative easing,” or QE, which essentially consists of increasing the money supply to inflate asset prices. As in 1971, the United States was acting unilaterally to weaken the dollar through inflation. QE was a policy bomb dropped on the global economy in 2009, and its successor, promptly dubbed QE2, was dropped in late 2010. The impact on the world monetary system was swift and effective. By using quantitative easing to generate inflation abroad, the United States was increasing the cost structure of almost every major exporting nation and fast-growing emerging economy in the world all at once.

Quantitative easing in its simplest form is just printing money. To create money from thin air, the Federal Reserve buys Treasury debt securities from a select group of banks called primary dealers. The primary dealers have a global base of customers, ranging from sovereign wealth funds, other central banks, pension funds and institutional investors to high-net-worth individuals. The dealers act as intermediaries between the Fed and the marketplace by underwriting Treasury auctions of new debt and making a market in existing debt.

When the Fed wants to reduce the money supply, they sell securities to the primary dealers. The securities go to the dealers and the money paid to the Fed simply disappears. Conversely, when the Fed wants to increase the money supply, they buy securities from the dealers. The Fed takes delivery of the securities and pays the dealers with freshly printed money. The money goes into the dealers’ bank accounts, where it can then support even more money creation by the banking system. This buying and selling of securities between the Fed and the primary dealers is the main form of open market operations. The usual purpose of open market operations is to control short-term interest rates, which the Fed typically does by buying or selling the shortest-maturity Treasury securities—instruments such as Treasury bills maturing in thirty days. But what happens when interest rates in the shortest maturities are already zero and the Fed wants to provide additional monetary “ease”? Instead of buying very short maturities, the Fed can buy Treasury notes with intermediate maturities of five, seven or ten years. The ten-year note in