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."