Tuesday, February 22, 2011

G-19 Plus One

“Another phenomenon on display (at the G-20 conference over the weekend) was China’s willingness to continue fighting on its own in the G-20 if necessary.” (See “G-20 skeptics wait for shift in behavior”: http://www.ft.com/cms/s/0/1b5a9a62-3d23-11e0-bbff-00144feabdc0.html#axzz1EcmIs0vg.)

“In the face of determined and often solo opposition from China, the finance ministers did not mention foreign exchange reserves in the list of indicators (to be used in determining economic imbalances in the global economy).”

Actually, the makeup of the G-20 seems to look more like a quadrilateral. At the corners: China; and the United States; and Germany; and the rest.

China seems to be holding its own against the others: Eswar Prasad, former head of the IMF’s China division stated that “With the rest of the G-20 arrayed against it, China still managed to hold its own.” China, more and more, is feeling its rising strength in international policy discussions.

Then there is the United States. Over the weekend we heard comments from Ben Bernanke, Chairman of the Board of Governors of the Federal Reserve System, and Tim Geithner, United States Secretary of the Treasury.

The common thread in the remarks of Mr. Bernanke and Mr. Geithner: the problems connected with the international imbalances are the fault of China…or, everyone else. The United States is not responsible for any of the imbalances that have occurred.

But, people don’t really seem to be listening to “Ben and Tim” any more, a sign of the respect the United States now gets in the world.

Germany, well, Angela Merkel, the German leader, has problems at home. She is perceived as not tough enough and the feeling is that she has sold out to the rest of Europe. Thus, she is trying to re-establish herself and deal from the strength of the German economic position without sounding conciliatory.

And, the rest of the crop? Well, Nicholas Sarkozy has not taken the G-20 leadership anywhere and although he wanted to use it as a vehicle to regain his popularity in France…or anyplace else it seems. His agenda for the year seems to lie in tatters.

The others…there is no mention of them…well, with the exception of words from Brazil from


There is no real leadership anywhere, and, there is no real current crisis that needs attending.

So, everyone can basically stake out their own claims and gripe about the others.

However, this does not satisfy anybody.

Everyone knows that there are all kinds of financial and economic problems in the world. But, no one seems to be in a position to really drive home the point that something needs to be done about them.

China and the emerging nations in the world are on their own track, economic growth seems to be robust with the prestige of this group on the upswing. Momentum seems to be on their side.

The United States, the eurozone, the UK…the developed world…seems to be experiencing some

kind of a recovery…but…nothing seems to be easy.

And, a worldwide inflation that seems to be picking up steam.

As a result…the shadow of (financial) crisis seems to looming over everything in the western world.

The eurozone has not resolved its problems, either in terms of the sovereign debt issue or the healthiness of its banking systems. Many investors are just hanging around waiting for the next round of the crisis to rear its ugly head. There still is the feeling that some nations are still going to have to write down their debt. The questions there revolve around when this might occur and just how many nations will be involved.

And, with the menace of inflation growing in Europe and the UK, mediocre economic growth is keeping the European Central Bank and the Bank of England on the sidelines with respect to raising short term interest rates. Also, raising short term interest rates might disturb the financial markets.

The United States government has the cloud of a shutdown hanging over its head. And, even if a shutdown is avoided and some reduction in the budget deficit takes place, the country is still looking at a cumulative increase in the amount of government debt outstanding in excess of $15 trillion over the next ten years. But, the United States still has the reserve currency of the world, and, as long as the United States continues to hold onto this privilege, serious concern over the debt of the government will remain muted. All seems to be posture, there is really no sense of urgency.

Concern still exists in the rest of the world concerning all the reserves the Federal Reserve has pumped into the banking system. The total of commercial bank reserve balances with Federal Reserve banks, a proxy for the excess reserves in the banking system, exceeds $1.2 trillion, a rise of more than $200 billion over the past six weeks. And, the Fed continues to keep its target short term interest rate below 25 basis points and still is not expected to allow this rate to creep up for several months more at the least.

Interest rates in the rest of the world (like in China and Brazil) continue to rise and continue to draw liquid funds from the United States and Europe.

This scenario continues to promise volatility in financial markets. If the global problems are not resolved and the financial imbalances continue to exist, the world will remain unsettled and funds will flow here and there as dramatic movements take place…in financial markets…in commercial banks…in commodities…in whatever markets seem to be the most unstable for the moment.

Is it going to take another major crisis to get action? We had a major financial crisis just a year ago or so and the response to it was pathetic and remains so. Do we really need another one to get people to move?

Here is where China…and Brazil…and a couple of other countries are setting in the driver’s seat. And, the west doesn’t seem to see the situation as a game of chicken. China…and Brazil…and others are not going to blink as long as the United States and Europe continue to drive their midget car against the huge SUV being driven against them. Right now, China does not believe it has to budge from its position. The United States and Europe argue that China is being “unfair”. And, Chinese confidence seems to grow every day. The recent G-20 meeting just reinforces this picture.

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