"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

Sunday, October 24, 2010

The G20 Meeting of Finance Ministers. Success, Failure, or Irrelevant?

The G20 meeting of Finance Ministers has ended, and as usual, despite the fanfare and “historic” agreements there are now more question than answers on what exactly, was accomplished. The major topics covered were: the existing currency war that needs to be dealt with that apparently doesn’t exist in the eyes of the IMF, banking reform, IMF representation, and a US “solution” to the dilemma of rebalancing world trade.

I will not cover banking reform, as the point of this blog is to focus on the major geopolitical topics. So let’s look at the easiest topic first: IMF representation.

During the G20 meeting in Pittsburgh back in September, 2009 the G20 leaders agreed to eventually tackle the issue of emerging countries such as China’s and India’s underrepresentation. Since that meeting, there has been disagreement on who should sacrifice what, with Germany even suggesting that in return for Europe losing seats, the US should give up its veto. That did not happen, but it has been agreed by Europe to give up seats to the emerging countries. But there’s an issue here. Which European country will give up its seat? Who makes the decision? This reminds me of a quote attributed to Henry Kissinger, US Secretary of State under Nixon: If you want to speak to Europe, who do you call?” Ultimately, the decision will take a year or two, and some of the countries in the crosshairs, so to speak, are Belgium, The Netherlands, Denmark, and Switzerland. Switzerland, apparently, has some concerns here. From Swissinfo.ch:

A spokesman at the Swiss finance ministry, Roland Meier, said it was for the time being too early to say what impact the IMF reform would have. Switzerland is aiming to maintain its seat on the board because of its importance as a financial centre.

Two weeks ago, Swiss Finance Minister Hans-Rudolf Merz, said he was confident that Switzerland would be able to keep its seat on the IMF board as a result of its economy, the role of the Swiss franc and its financial contribution to the IMF. Source.
I’m sure Europe will ultimately decide who loses what. Right? Here is the full article on this “historic reform” by the IMF. Source.

The ongoing currency war

The IMF feels that a currency war is a possible threat that is unlikely to occur, but needs to be addressed. Yes that’s exactly how IMF Managing Director Dominique Strauss-Khan has characterized it in the past. My take is that the currency war is ongoing; it is not a possibility. The only issue that remains is how much longer will it take to intensify. It’s important to note that senior representatives from Brazil did not participate in this G20 meeting of finance ministers. Brazil’s finance minister, Guido Mantega, who recently proclaimed that a currency war was underway, decided he needed to stay in Brazil to fight this currency war. From Brazzilmag.com:

"All the world is aware that there's a currency war on and that we need G20 to discuss the issue and find a solution," said Lula speaking to journalists in Brazilian capital Brasília. The Brazilian leader is scheduled to travel to Seoul, South Korea November 11/12 for the G20 summit.

"We are going to do whatever is necessary to ensure that our Real does not keep appreciating against the so called 'strong' currencies thus impacting on our exports. I've given clear instructions to Finance minister Guido Mantega and Central bank president Henrique Meirelles to be alert the 24 hours and adopt all the necessary measures needed" to prevent the depreciation of the US dollar. Source.
Nonetheless, the G20 felt that the meetings on currency reform were a success. According to the communiqué that was issued:

“move towards more market determined exchange rate systems that reflect underlying economic fundamentals and refrain from competitive devaluation of currencies. Advanced economies, including those with reserve currencies, will be vigilant against excess volatility and disorderly movements in exchange rates. These actions will help mitigate the risk of excessive volatility in capital flows facing some emerging countries. Together, we will reinvigorate our efforts to promote a stable and well-functioning international monetary system and call on the IMF to deepen its work in these areas. We welcome the IMF’s work to conduct spillover assessments of the wider impact of systemic economies’ policies;”
Sounds like cooperation, right? But what about the US’s need to devalue in order to increase exports and service existing unbearably high debtloads? And what of the US’s ability to continue to deficit spend to stimulate the economy? Does anyone really believe Tim Geithner when he expresses a “strong dollar” policy? And what of China and Japan?

Well, here are some recent developments after the G20 meeting of the finance ministers:


Japan immediately broke ranks to declare that, contrary to the spirit of the communique, it would continue to devalue the yen if it saw fit.

Yoshihiko Noda, Japan’s finance minister, said: "A prolonged appreciation in the yen is not good for Japan’s economy. Our stance, that we will take appropriate, bold action if needed, is unchanged.” SOURCE.

The Federal Reserve’s push toward easier monetary policy is the “wrong way” to stimulate growth and may amount to a manipulation of the dollar, German Economy Minister Rainer Bruederle said…

“It’s the wrong way to try to prevent or solve problems by adding more liquidity,” Bruederle told reporters yesterday, saying that emerging-market officials were among the critics. Bruederle, a member of the Free Democratic Party, the junior partner in Chancellor Angela Merkel’s government, stepped in for hospitalized Finance Minister Wolfgang Schaeuble at the meeting.

“Excessive, permanent money creation in my opinion is an indirect manipulation of an exchange rate,” Bruederle said. The minister has taken a pro-market stance in his first year in office, criticizing state intervention in cases such as providing aid for General Motor Co.’s German Opel unit. SOURCE.
In a follow up post, I will address the final topic that was covered by the G20, the US’s push for a cap on current account surpluses. In my view, this is just another currency war weapon. Remember Kyoto and Copenhagen? Remember Cap and Trade and Climate Change? That too was an economic weapon pointed towards the currencies and economies of emerging countries. And just as that failed, so too will this push for capping trade surpluses. Don’t get me wrong, I agree that consistent and growing trade imbalances pose a danger, but only a new monetary system can address this.

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