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G-20 on collision course
By Donald Kirk | November 10, 2010

SEOUL - The United States and China are on a collision course as this week's gathering of leaders of the 20 most important economic powers threatens to devolve into a meaningless charade amid pressure against a US scheme to cure financial ills by printing ever-more money.

From China to Germany, Brazil to France, the world's financial wizards are up in arms about the decision of the US Federal Reserve to buy up US$600 billion in Treasury bonds in a move that may make the US the "odd country" out in the Group of 20 (G-20), when they meet in Seoul on Thursday and Friday.

The term for this move is quantitative easing (QE), and the latest round, on top of the earlier purchase of US$1.7 trillion, is dubbed QE2, but it won't be anything like a cruise on the old QEII, the luxury liner Queen Elizabeth II of a bygone era.

"One of the biggest concerns with this round of quantitative easing is that it will make the already weak US dollar even weaker," said the Bedford Report in an analysis of the market impact.

Lawrence Summers, US President Barack Obama's top economic adviser, danced around the issue on Tuesday in a teleconference with the Asia Society's Korea Center in which he said, enigmatically, "You are going to see continuing discussion at the G-20," but he acknowledged "the imbalances will not be fixed".

Nor was he at all optimistic about the G-20 reaching some semblance of consensus that might paper over the fissures, more like chasms, of disagreement. All he would say, in the most polite circumlocution, was, "I am confident we will reach a successful outcome at the summit."

Fed chairman Ben Bernanke is doing some fancy talking of his own to allay concerns, saying that buying up all those bonds, which calls for spewing out tonnes of plain old $100 bills, is "just monetary policy" by another means.

What else can you do, he pleads, with the high number of people out of work in the US , the rate of inflation below expectations and no more room for slashing short-term interest rates. The phenomenon of "a large amount of slack and declining inflation", he said, was "a signal that more should be done" and "the motivation" for the move.

As far as most of the leaders converging in Seoul for the G-20 are concerned, however, Bernanke is playing an old-fashioned game of voodoo economics, and they see the Fed's sudden move as carefully timed to undercut arguments for other G-20 nations not to act decisively in revaluing their own inflated currencies.

The Fed's grandstand play, they predict, will either backfire or have little impact in redressing what all acknowledge are gross "imbalances" in a system in which China and Germany are reaping fortunes in trade surpluses while the US and others have huge deficits.

The US gambit, if nothing else, provides more ammunition for all sides in what Brazil's Finance Minister Guido Mantega was the first to call "currency wars" for the pushing-and-pulling over currency revaluation.

Until the Fed's move last week, Mantega was the most outspoken among the ministers of the BRICs - Brazil, Russia, India and China - a loose assortment of countries that investors and economists like to describe as "new emerging markets" covering large geographical areas, large populations and growing industries.

He did not hesitate to blame the US for adding to global economic distress by printing ever-more money while failing to bring its trillion-dollar budget deficit under control. "For me, most destabilizing for the global exchange is the devaluation of the dollar," he has said,

Since the Fed's latest move, leaders and their financial gurus from a host of countries are joining the chorus, loudly publicizing views that they had been reluctant to express so openly for fear of upsetting the G-20.

Who would have imagined, for instance, that German Finance Minister Wolfgang Schauble would have denounced US fiscal policy as "clueless" or that his South African counterpart Pravin Gordhan would have stated so frankly that the impact was to "undermine the spirit of multilateral cooperation that G-20 leaders have fought so hard to maintain during the current crisis".

The Chinese, the US public enemy number one on currency issues due to its to refusal to cooperate on drastically revaluing the yuan, were not quite so outspoken, but if anything more forbidding in their staunch defense of their own policies. Why, asked Vice Foreign Minister Cui Tiankai, does the US hold China responsible for its own failure to hold down its budget, and why does the US persist in demanding that China increase the value of the yuan while simultaneously devaluing the dollar?

With all the annoyance over US monetary policy, one has to wonder what Obama is going to tell China's President Hu Jintao when they meet at the opening session on Thursday in the vast Convention and Exhibition Center and then dine that evening at the National Museum. The concern is not that they'll shout at one another, or even display overt coolness. Rather, they're likely to talk in the same bland generalities with which the G-20 finance ministers and central bank governors covered their differences last month in the ancient Silla kingdom capital of Gyeongju, in southeast Korea.

Obama is absolutely sure to say, in effect, look guys, the whole world is going to have a much healthier economy if the US economy improves. And to do that, he'll say, we need to cut down our trillion-dollar trade deficit and you guys gotta set your currencies at their real values and stop dumping all that low-priced stuff on us.

And Hu and all the others are going to nod politely while going off on their own double talk about their sincere desire to reduce imbalances and, while they're at it, elevate all those poor nations that the G-20 is making a major conference topic under the rubric, "development".

Trouble is, the Fed's move is going to seem to some of those leaders, including Hu, as almost a betrayal of Gyeongju, where US Treasury Secretary Timothy Geithner got off to a bad start by trying to talk the other G-20 ministers into confining their surpluses to 4% of their current account surpluses.

China and the rest shot down that idea so fast at Gyeongju that Geithner was left sputtering he didn't quite mean that, just that everyone should be good. The final statement papered over everything with ritualistic cant about the evils of protectionism, the need for price stability and, if nothing else, progress toward "exchange rate systems that reflect underlying economic fundamentals and refrain from competitive devaluation of currencies".

That kind of mumbo-jumbo would appear ideally suited as a model for the "action statement" that should emerge from the G-20 on Friday. Geithner himself, after the gathering of Pacific-rim finance ministers at the Asia-Pacific Economic Cooperation group confab in Kyoto, was talking up that old catchall, "flexibility".

Targets, said Geithner, were "not something you can reduce easily to a single number". Indeed, lest any of them hark back to Gyeongju, he added for good measure that targets were "not desirable, necessary and it's not likely at this stage", he said. Nor did he see "re-emergence of the type of excess imbalances on the trade side, either surpluses or deficits that could threaten future financial stability".

But what if the meetings surrounding the summit get heated, what if the "sherpas", the special word for the senior finance people from each country who are spending much of the week frantically trying to iron out differences, are so taken aback by the latest US solution to its problems that they really get stuck on coming up with a fresh formula?

With G-20 countries at severe odds on the dominant issue of US-led demands, South Korea basks in the spotlight of center stage. Jang Ha-sung, dean of the business school at Korea University, sees "China, India and Korea together as the largest portion of the emerging market countries".

When it comes to the issues that never go away, those of imbalances in currency, trade and income, Jang makes an extraordinary prediction that may not sit well with Geithner's incessant demands for the revaluation of China's currency.

"My sense is the Chinese yuan will be one of the world's top currencies," he says. "The Chinese yuan will be stronger than the Japanese yen or even the euro or the dollar, and the Chinese will play a key role in global recovery."


G-20 on collision course
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