The "Do-Nothing" G-20

The finance ministers of the G-20 just finished meeting. Result: the Yankees and the Phillies are not going to be in the World Series this year. The leaders of the G-20 are going to meet in Seoul, South Korea in November. I think that we can expect little or nothing to come out of this get-together.

The whole cloud, I believe, hanging over international finance at the current moment is the economic policy stance of the United States government.

Oh, we can point our fingers at the Chinese, but it is the Americans that have set the tone for the world. And their current pronouncements about future fiscal and economic policy promise nothing more than a continuation of the past.

Martin Wolf, in the Financial Times stated it very clearly: the United States is trying to inflate China and in so doing inflate the rest of the world. (See http://www.ft.com/cms/s/0/9fa5bd4a-cb2e-11df-95c0-00144feab49a.html.)

Joseph Stiglitz, the Nobel Prize winning economist, argues (in “Why Easier Money Won’t Work”, http://professional.wsj.com/article/SB10001424052702304023804575566573119083334.html?mod=WSJ_Opinion_LEADTop&mg=reno-wsj) that “Such policies (Quantitative Easing on the part of the Federal Reserve) may come with a price…That money is supposed to reignite the American economy but instead goes around the world looking for economies that actually seem to be functioning well and wreaking havoc there.”

Mohamed El-Erian, CEO of PIMCO, stated just last week that when the Federal Reserve creates liquidity it just spreads throughout the world going where ever it wants to. Worldwide capital mobility is a feature of the 21^st century international financial system.

Stiglitz continues: “The downside is a risk of global volatility, a currency war, and a global financial market that is increasingly fragmented and distorted. If the U. S. wins the battle of competitive devaluation, it may prove to be a pyrrhic victory, as our gains come at the expense of others—including those to whom we hope to export.”

But, the United States has been conducting an economic policy for the past fifty years that has relied upon credit inflation to keep unemployment low, to provide individuals and families with homes, and to keep American manufacturers operating at high levels of output. (See my post “Maybe Things Have Changed” for October 22, 2010 at http://maseportfolio.blogspot.com/.)

Things began to get out-of-hand in the 1990s during the stock market boom connected with the tech bubble. Stiglitz again, “In 2001, (then) record-low interest rates didn’t reignite investment in plant and equipment. They did, however, replace the tech bubble with an even more dangerous housing bubble. We are now dealing with the legacy of that bubble, with excess capacity in real estate and excess leverage in households.”

And, these bubbles became world wide as the debt of the United States and the liquidity provided by the Federal Reserve System spread almost everywhere. The conditions we are living through at the present time were a long time in coming and have damaged other countries as well as the United States.

The world seems to be dividing into three (I previously thought it was just two) parties. The first is the emerging countries who seem to be doing OK and seem to be in the strongest position right now. These nations are the BRIC countries and others (like Canada) who have weathered the recent economic and financial meltdown in relatively good shape. The second group consists of the more developed countries, primarily in the West, that have followed economic policies not too different from the United States, like Great Britain, France, Spain, Italy, Greece, Portugal, and Ireland, who have experienced a sovereign debt crisis over the past year or so and are re-grouping by getting their financial affairs in order and adopting a different economic strategy for the future.

The third party contains just one nation, the United States. The United States is not showing any signs that it is getting its financial affairs in order. Furthermore, the economic policy philosophy prevalent in the United States government differs from what existed over the past fifty years only in terms of magnitude. The economic policy philosophy of the American government just seems to be even more of the same.

The leaders of the United States government have presented a common front to the world: our economic policy stance is a given. Now, let’s work out world financial reform.

I don’t see how anything new can be worked out in the G-20 or any other international body if the United States continues to take such a strong position. I believe this is the underlying message sent by the finance minister from Brazil who declined to attend the meeting that was just completed.

Nothing can be done to solve the imbalances in world finance if the United States continues to be un-moveable when it comes to its economic policy stance.

The world has changed. Things within the United States have changed. This is what my Friday post (http://maseportfolio.blogspot.com/) was all about.

But, the leaders in the United States continue to focus on their navels and claim that the problem is “out there”.

And, that is the problem.

World co-operation cannot come about when one country believes it has all the answers.

As such, I see the value of the dollar continuing to decline; the world situation will continue to remain unsettled with regard to countries co-operating with one another; and I see continued economic imbalance and dislocation, both in the United States, itself, and in the world.

A Picture of China and the Future

One should read the article by Gillian Tett in the Financial Times this morning. The title in the print copy is “Asia Pulls Strings Behind Scenes as Eurozone does Bank Test U-turn,” (http://www.ft.com/cms/s/0/e73958fe-8f67-11df-ac5d-00144feab49a.html). The article presents a vivid picture of the world of the future, something people are going to have to get used to.

The scene: the meeting of the G-20 in Busan, South Korea, June 4-5, 2010.

The subject matter: whether or not the eurozone governments should publish the results of the stress tests being performed on the largest banks within the region.

The result: the “eurozone governments performed a U-turn, by finally agreeing to publish the results of such tests.”

The reasons given: one argument was that lobbying had taken place inside the European Central Bank and this caused the change; another argument was that United States Treasury Secretary Tim Geithner persuaded his eurozone counterparts to alter their position.

Tett reports, however, that it was the “powerful Asian investment groups and government officials” that won the day. These officials “expressed alarm about Europe’s financial woes” and indicated that future purchases of eurozone bonds might be substantially reduced until more information was available to them on the health of Europe’s banks.

“That, in turn, sparked a sudden change of heart among officials in places such as Germany and Spain.”

This is important!

It is important because this is, more and more, the way that the world is moving.

Note, this encounter took place at the G-20, not the G-8. The smaller group is fading into the shadows because it does not include the emerging nations that are becoming relatively more important in the economic and financial affairs of the world. It is less easy for the United States to dominate the larger group and there is no history of total United States dominance in this group as there is in the smaller group.

Second, the emerging nations included in the G-20 have substantial amounts of wealth and their economies are in better condition than are those of their western counterparts. These nations are becoming more comfortable with the power they possess.

In one sense, events could not have broken more favorably for these emerging nations than they did. Before 2008 the question always seemed to be “When would China and the other emerging nations catch up with the United States and Europe in terms of economic power? These nations were coming along, but a productive and growing United States would be hard to catch. People thought that it would be the 2020s or the 2030s before the relative gaps would close significantly enough to alter political relationships.

The Great Recession changed all that! The United States and Europe have had lots of problems to deal with. And, not only was their economic strength tested, but their focus was diverted away from the improving performance of the emerging nations. And, these economies apparently will remain weak for an extended period of time. China, and the other BRIC nations…and a few more…have been testing the waters, standing up to the “big guy” or “big guys” and testing just how far they can push the envelope.

The result is that the leaders of these emerging nations, political and business, are taking a more aggressive stance in almost every area of concern. And, by-and-large, the United States and Europe and the UK are having to take it. They are just not in a position to put up much of a fight.

Third, the competition taking place in the world is not just between the United States (and Europe) and each BRIC country. Competition is also becoming quite fierce between these countries. (Note another article in today’s Financial Times about South Asia. The subheading states that “India’s failure to match its economic clout with local influence has heightened Delhi’s concern over losing out to China in what is set to be a long-running battle for ascendancy.” (http://www.ft.com/cms/s/0/11872b80-8f78-11df-8df0-00144feab49a.html)

But don’t leave out Russia and Brazil. Each of these countries, in its own way, is gaining relative to the United States, but also is engaged in competition with China…and India.

And what about Japan? And, Canada? Then there are several other players in the world.

What did we just see in the newspapers? Pictures of BP president Tony Hayward meeting with the president of Azerbaijani. BP has turned to the middle east to either raise additional capital or sell assets. But, Citigroup did that along with a dozen or more other major corporations from the west.

Countries not only have to be concerned about their position relative to the United States (and Europe) they have to consider how they stand relative to a dozen or more other nations in the world. This is not an environment in which these nations can “stand down.” They must be strong and competitive against all comers.

So, things are changing. Ms. Tett’s article just points to the fact that the influence of China is growing along with their confidence. This is also being seen in the behavior of the leaders of other nations, like the connections Brazilian President Lula da Silva is making with the leaders of countries that are not necessarily friends of the United States, like Venezuela and Iran.

This situation is not likely to change unless these emerging nations plunge into a Great Recession and have to re-focus their efforts on re-building their economies and restoring their financial wealth.

Also, as Ms. Tett implies, China and the other emerging nations are still testing the waters. “There is little sign those investors are being ‘intimidating’.” Yet, they are in the process of finding out how far they can go. But, this process will continue and that is why examples like the one presented in her article are a harbinger of the future. Tomorrow, these investors might by “intimidating”!

Economic and financial wealth is spreading throughout the world. Influence and power follows economic and financial wealth. In the emerging competition taking place in the world between the United States and other countries and within the other countries themselves, it is hoped that the competition does not boil over into wars, either trade wars or fighting wars.

Unfortunately, these wars have not been avoided in the past. The question is, what kind of world can the United States and the other emerging nations create that will allow economic and financial competition to take place within and between nations without the competition deteriorating into trade wars or fighting wars?

The signs of the future competitive world are there. How the world works out this future is the big issue.

Follow the Dimon!

For months I have been arguing in my blog posts that the larger banks have already moved beyond the regulators although they have always been far in advance of the politicians. These latter two groups of people are attempting to create a regulatory system that will prevent the events of 2007 through 2009 from happening again.

Would somebody tell them that the big banks are somewhere else.

JPMorgan Chase announced some major changes in their top management structure yesterday. These changes, to me, are just the most visible sign that the banking of the future is going to be significantly different from the banking of the past. But, we’ll come back to this later on.

The management changes also confirm, to me, that Jamie Dimon is the pre-eminent banker in today’s world.

Why?

A long time ago I stopped looking at the “glow” of the person running things, the Chairman, President, or CEO, and I started concentrating on the people around the glorious leader. I found that the fact that the leader of an organization had very, very capable and experienced people around them was a better indicator of the quality of the person in charge than was his or her own sparkling image.

Top people have top people around them. In addition, winners help to make everyone around them perform better.

Jamie Dimon has these qualities.

I believe that Jack Welch also had them.

One person I had contacts with at one time who, I felt, didn’t have these qualities and was a disaster waiting to happen, was Donald Rumsfeld.

Jamie Dimon has a top notch team around him and is positioning them to take on the world. In my estimate, more than one of the individuals that are on this team will be a Chief Executive Officer of a major bank in the United States…or, the world.

Many people that Jack Welch had around him went on to lead major companies around the world.

But, back to the banking changes: JPMorgan is going off-shore!

The New York Times has it right, “JPMorgan Sets Sights Overseas,” (http://www.nytimes.com/2010/06/23/business/23bank.html?ref=business). Dimon has given out the mandate to his closest lieutenants “to start a global corporate banking business and scout out opportunities in Europe, Latin America and Asia.” Mr. Dimon, himself, has recently been in China, India, and Russia and wants to especially focus on these three BRIC countries as well as Brazil and also Vietnam, Indonesia, Malaysia, the Philippines and parts of Africa.

My suggestion: Watch what Mr. Dimon and JPMorgan do. My guess is that they will point the way to the future and will do a good job along the way!

But, what about American and Europe?

In terms of banking and finance, I am not sure the political and governmental leaders in these areas of the world know what they are doing. For one, as I have said over and over again, in terms of financial regulation…they are fighting the last war!

Politically, both areas are split and looking for direction. No one can tell at this time where “direction” will come from.

So, what better time than this to move to where the action is going to be!

If anything, the fiasco going on in Washington, D. C. is going to drive business and finance further off shore. The BRIC nations are becoming wealthier and more savvy in the world. They are also accumulating more power as will be in evidence in the upcoming G-20 meetings. But, as Mr. Dimon indicates, there is a lot more going on if one looks to the other countries he has highlighted in his recent statements.

Moving in this direction will involve acquisitions, something that JPMorgan has already started doing. To build itself into a larger presence in these markets in a timely fashion, the company will have to acquire significant other properties. JPMorgan Chase is going to get bigger.

And, Washington was concerned with the size of the banks in the United States that were “too big to fail” in 2008?

Furthermore, this doesn’t even get into one of my favorite subjects, the “quantification” of finance. What is going on with respect to the “quants” in JPMorgan? My guess is that there has been significant movement in this area as well over the past two years.

The future of banking?

Keep your eyes on the Dimon. I think you will find that it will be time well spent!