"There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency system involved."
- Ludwig von Mises

Thursday, September 30, 2010

"Major IMF Reforms" Forthcoming

According to South Korea's The Chosen Ilbo:

'Major IMF Reforms' to Be Announced at G20 Summit

The International Monetary Fund expects major changes within the fund to be announced at the G20 Summit in Seoul next month. "I won't say that we're close to an agreement, but we're not very far," IMF Managing Director Dominique Strauss-Kahn said, and a deal could be reached by November.

The comments came amid mounting tensions between the U.S. and Europe countries over the need for major changes to the IMF.

In a press conference Tuesday at IMF headquarters in Washington D.C., Strauss-Kahn told reporters that some European countries should relinquish their board seats at the fund to make way for emerging economies. "Giving seats to countries such as Turkey or South Korea -- whose G20 economies surpass those of the Netherlands or Belgium, both of which have IMF board members -- would likely have to come at some European nations' expense," he added.

Conflict is growing between the U.S. and Europe over changes at the fund ahead of the IMF's annual general meeting in Washington on Oct. 8-10.

Meanwhile, Strauss-Kahn said there is little chance of a "currency war" with individual countries devaluing their currencies against the U.S. dollar triggered by Japanese intervention in the foreign exchange market earlier this month for the first time in six years. "Currency intervention is unlikely to be successful. Too small an intervention doesn't have any effect... and too large a move can trigger retaliation by trading partners. It's clearly not a global solution," he said.
This could be a significant development but keep in mind the person saying this, Dominique Strauss-Khan, the current IMF Managing Director, is also not acknowledging the existing currency war.  In my opinion, this currency war is very real, albeit still in the beginning stages.  If one looks at the current trade and debt imbalances, currency devaluation is the only option.  And this time, we are not looking at a 1980s Latin American crisis or a 1990s Asian crisis.  This crisis invloves the largest countries and regions - the US, the EU, and by association, China and Japan. 

It's one thing when a small nation or a small group of nations experience a currency crisis while the world economy is booming and money is organically flowing.  It's another when nations with major currencies experience severe balance sheet recessions while the global economy falters, and money needs to be "prodded" and printed by central banks to keep the system running because the major commercial banks are effectively undercapitalized.

This November's G20 meeting in South Korea is an extremely important affair in the current global financial crisis.  It will tell us:

1) How relevant and powerful the US remains - watch the US in terms of the Chinese yuan, and on retaining its veto.

2) This will also be a big test for the EU.  Will it give in to emerging countries by losing seats?  At what cost?  Will it be able to make the US also give something up in return?  Is the EU geopolitically relevant?  See this post: Pre - G20 Meeting between France, Germany, and Russia - What's Cooking? ...

3) How will China act?  It looks to me that China has been acting agressive lately (Fishing Captain incident, rare earths issue, protectionist measures against the US) as a pre-emptive method of setting the tone for the upcoming IMF meeting.  China is flexing its muscles to make sure everyone knows at the G20 that it is no longer an emerging country, but an emerging global power.

The world changed with the fall of the Berlin Wall, the USSR, and Tianamen Square.  But guess what?  It is changing again.  The hubris exhibited by the US post USSR,  "The end of history," days are over.  Something new is being born.  Watch gold.... watch the dollar.  and watch how this multilateral world reacts before and during the IMF meeting in South Korea this November.

Very interesting times indeed.

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