“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
time-to-time.
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.
Showing posts with label G-20. Show all posts
Showing posts with label G-20. Show all posts
Tuesday, February 22, 2011
Monday, November 1, 2010
"Remember Bush Appointed Bernanke"--President Obama
Almost everything that Bernanke has done has been wrong. The only thing people can really give him credit for is for throwing enough spaghetti against the wall in late 2008 so that some of it would stick to the wall. But, even this action may have resulted in action from an emotional scare that was something less than rational. See “The Bailout Plan: Did Bernanke Panic?” (http://seekingalpha.com/article/106186-the-bailout-plan-did-bernanke-panic)
Now we stand on the verge of another round of spaghetti tossing. The Fed, and many other central banks around the world, are meeting this week. “This week’s meetings are the greatest concentration of monetary-policy action by leading central banks since the first week of October 2008, when they met in emergency sessions to fight the global financial crisis.” (http://www.bloomberg.com/news/2010-11-01/thirty-three-hour-marathon-may-induce-ecb-surrender-as-fed-weakens-dollar.html)
The Washington Post puts it very bluntly: “Federal Reserve’s Bernanke on Line with New Move to Boost Economy” (http://www.washingtonpost.com/wp-dyn/content/article/2010/10/31/AR2010103103818.html?hpid=topnews). “The Federal Reserve is preparing to put its credibility on the line as it rarely has before by taking dramatic new action this week to try jolting the economy out of its slumber.”
This action just re-enforces the desperation of current policy makers. Their model is wrong, yet they persist in trying to make it work. (http://seekingalpha.com/article/232971-international-capital-mobility-the-united-states-dilemma) People are always their most desperate when they are losing control. In an effort to re-gain control they try more and more of the same old medicine.
How do you like this quote? “We’re very concerned about what to do. One thing we know is that when the bond rally ends, it will not end well.” This quote is attributed to Bob Michele, the chief investment officer at JPMorgan Asset Management. (http://www.ft.com/cms/s/0/d7abb7c2-e51d-11df-8e0d-00144feabdc0.html)
In addition, this behavior on the part of the Federal Reserve System and of the Obama administration is undermining confidence in political relationships around the world. “Traders are losing confidence in Group of 20 finance officials’ pledge to avoid foreign-exchange manipulation, less than a week after the leaders vowed to stop devaluing currencies to prop up their economies.” (See “Currency Swings Show G-20 Faith Fading as Korea Eyes Controls,” (http://www.bloomberg.com/news/2010-11-01/currency-swings-show-traders-losing-faith-in-g-20-as-korea-eyes-controls.html).
This comes after the feeble attempts of Treasury Secretary Geitner to get China to act in the interests of the United States. Again, this can be seen as a seemingly desperate try to put the blame on someone else.
The G-20, under these circumstances, is incapable of making an enforceable pledge. (See “The Do-Nothing G-20”: http://seekingalpha.com/article/232007-the-do-nothing-g20.)
As long as the United States continues to persist in its current policy stance things will not change. The Obama administration, plus the Federal Reserve, has made it very clear what their policy is going to be. And, since the rest of the world knows what the Federal Reserve policy will be, the rest of the world will act accordingly,
Consequently, this just makes the United States a sitting duck!
But, Bush 43 appointed Bernanke. Oh, yes, President Obama re-appointed him, but like TARP and some other things, a president cannot just eliminate the past. A president has live with some of the decisions of his predecessor. Right?
The world is waiting for the results of the meeting of the Board of Governors of the Federal Reserve System on November 2 and 3. The European Central Bank, the Bank of England, the Bank of Japan and the Reserve Bank of Australia also have meetings scheduled for this week. We may look back on this week as another significant date in the history of the Great Recession of 2008-2009 and its aftermath.
Unfortunately for President Obama, the legacy appointment of Ben Bernanke may play a large role in the definition of his place in history.
Monday, October 25, 2010
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.
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.)
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.
Sunday, October 10, 2010
You Can't Lead Out Of Weakness: The IMF Meetings
With each international meeting it is becoming more and more obvious, the United States is dealing from a weakened hand.
The New York Times makes it very clear: “Despite loud calls from the United States; and more muted appeals by Europe, Japan and other countries, the annual meeting of the International Monetary Fund did not succeed in placing significant pressure on China to allow a prompt and meaningful rise in the value of its currency.” (See “Financial Leaders Decline to Press China on Currency,” http://www.nytimes.com/2010/10/10/business/global/10imf.html?_r=1&ref=todayspaper.)
The language in the concluding statement of the policy-setting committee of the IMF “was benign.” Everything was postponed to the G-20 meeting in Seoul, South Korea in November.
The United States took a strong position on the value of the Chinese currency and the behavior of the Chinese government with respect to this value. The United States Congress made its will known in late September. Treasury Secretary Geithner also spoke out about the need for action on the part of the Chinese. President Obama has even made mention of the issue.
But, policy-makers are “wary about pressuring China too severely.”
Right now, China seems to hold the cards and no one is willing to move strongly against their position.
Most revealing is the fact that the United States seems to be in no position to press its points with its own actions and does not seem to be strong enough to command support among the other nations that might side with it.
Furthermore, the central bank of the United States, the Federal Reserve System, appears to be on the verge of another round of “quantitative easing”, something that world financial markets have reacted to by selling dollars. The world investment community has not given the United States a very good grade in terms of how its government has managed the monetary and fiscal policy of the country over the past eight years or so and sees these additional efforts as just a continuation of the lack of foresight and discipline and will in its economic policymaking.
If this is the prevailing attitude in the world about the economic policy of the United States, then one can only project further declines in the position of this country in the evolving discussions about world financial arrangements.
The United States has dealt itself a weak hand in world economic affairs. Unless it steps back and re-assesses how it got here and what it needs to do to change the situation, it will just continue to further weaken its position. And, it is very hard for a nation to lead when it is continually hurting itself.
The New York Times makes it very clear: “Despite loud calls from the United States; and more muted appeals by Europe, Japan and other countries, the annual meeting of the International Monetary Fund did not succeed in placing significant pressure on China to allow a prompt and meaningful rise in the value of its currency.” (See “Financial Leaders Decline to Press China on Currency,” http://www.nytimes.com/2010/10/10/business/global/10imf.html?_r=1&ref=todayspaper.)
The language in the concluding statement of the policy-setting committee of the IMF “was benign.” Everything was postponed to the G-20 meeting in Seoul, South Korea in November.
The United States took a strong position on the value of the Chinese currency and the behavior of the Chinese government with respect to this value. The United States Congress made its will known in late September. Treasury Secretary Geithner also spoke out about the need for action on the part of the Chinese. President Obama has even made mention of the issue.
But, policy-makers are “wary about pressuring China too severely.”
Right now, China seems to hold the cards and no one is willing to move strongly against their position.
Most revealing is the fact that the United States seems to be in no position to press its points with its own actions and does not seem to be strong enough to command support among the other nations that might side with it.
Furthermore, the central bank of the United States, the Federal Reserve System, appears to be on the verge of another round of “quantitative easing”, something that world financial markets have reacted to by selling dollars. The world investment community has not given the United States a very good grade in terms of how its government has managed the monetary and fiscal policy of the country over the past eight years or so and sees these additional efforts as just a continuation of the lack of foresight and discipline and will in its economic policymaking.
If this is the prevailing attitude in the world about the economic policy of the United States, then one can only project further declines in the position of this country in the evolving discussions about world financial arrangements.
The United States has dealt itself a weak hand in world economic affairs. Unless it steps back and re-assesses how it got here and what it needs to do to change the situation, it will just continue to further weaken its position. And, it is very hard for a nation to lead when it is continually hurting itself.
Friday, October 8, 2010
The IMF Bowl: the United States versus China
With the IMF annual meeting taking place this weekend in Washington, D. C., it is hard to pick on any other topic than what is happening in economics and finance in the world.
The underlying story: the United States has not been challenged, financially as well as economically, in many years and has grown comfortable with its position as the Number One Player (NOP) in the World.
Plot line: the United States will not fall from its position as NOP but other countries are becoming relatively stronger, especially China.
Scenario: China smells weakness in the United States position. When an “opponent” smells weakness, that “opponent” steps up its game. Most experts expected China to “step up its game” at some time in the future, but they did not expect this behavior to happen so soon.
Response: the NOP calls “foul”! The first reaction of the NOP is to claim that the “opponent” is cheating or playing dirty. The NOP tries to get those on the sideline into the game in order to overcome the pressure that the “opponent” is applying to the NOP. China bashing has become de rigueur in the United States, especially for those running for office in this fall’s elections. (“China-Bashing Gains Bipartisan Support,” http://professional.wsj.com/article/SB10001424052748704689804575536283175049718.html?mod=ITP_pageone_2&mg=reno-wsj.)
Script: the battle goes on. This conflict is not going to be resolved this weekend. Nor is the conflict going to be resolved at the G-20 meetings in November. The conflict, for the time being, is going to be played out on the playing fields. The “opponent” is going to push the NOP and is going to hit the NOP on many different fronts.
For example, another move by the “opponent’ is the effort by the Chinese to make its currency, the yuan, more global. Last week, electronic trading of the yuan began. Further efforts are underway to expand this trading to banks in the United States and in Europe. (“Yuan Goes Electronic in Global Market Bid,” http://professional.wsj.com/article/SB10001424052748704011904575537754269611906.html?mod=ITP_moneyandinvesting_0&mg=reno-wsj.)
“China’s government has made a series of moves in the past year to encourage the yuan’s use outside China, an effort to become less dependent on the dollar for trade and investment. The moves are allowing pools of yuan to accumulate in bank accounts outside of China, particularly in Hong Kong.
Hong Kong banks have been trading the currency among themselves, but through over-the-counter trades where the banks contact each other directly or through brokers.”
This new move will mean that prices and trading amounts will be posted for all to see.
The effort to improve its relative position in the world is not going to stop. China is making efforts on many fronts to strengthen its position in the world. The contest is on.
Leaders in the Obama administration, from the President to the Secretary of the Treasury on down, are speaking out more forcefully against the actions of the Chinese.
World leaders are observing this conflict and are trying to keep the discussions civil and “in bounds”. This is why someone like the managing director of the IMF, Dominique Strauss-Kahn, as well as others, are attempting to temper the rhetoric and bring things into the existing organizations that deal with trade and international finance. (“IMF Chief Steps into Dispute over China’s Currency Policy,” http://www.nytimes.com/2010/10/08/business/global/08currency.html?ref=business.)
Players crying “foul” can only achieve so much. Sooner or later the NOP will have to modify its game plan and raise its play to another level. The “opponent” is not going to lessen its pressure as long as weakness in perceived in the NOP.
And, where does this weakness show? One very prominent place this weakness shows is in the value of the dollar. Since the early 1970s when the dollar was taken off the gold standard, the value of the dollar has declined by about 40%. Except for the “flight to quality” periods experienced during the financial unpleasantness of the 2008-2009 period, the dollar has continued to be in decline from the level it reached during the Clinton years. The international investment community is not “in love” with the fiscal and monetary policy of the United States government.
This contest between China and the United States is for real. The pressure from the Chinese is not going to abate anytime soon. The “rest-of-the-world” is not in any position to contain this conflict unless it shuts down world trade, something it will not do.
This means that the United States must get its act in order. The United States cannot compete with 20% to 25% of its industrial capacity not being used. The United States cannot compete with 20% to 25% of its labor force under-employed and not trained sufficiently to work in the modern economy. The United States cannot compete when its government creates incentives for people to protect themselves from credit inflation rather than engage in productive pursuits.
And, fiscal stimulus by the government and quantitative easing on the part of the monetary authorities will not correct these problems. They will only indicate to the Chinese how weak the United States has become.
This contest between China and the United States is for real. The only way the United States can “raise its game” is by focusing on what can make it more competitive. I don’t believe that the United States will ever again get the “free ride” it benefitted from over the past thirty years or so. So, the United States government must change the way it does business.
The Chinese are only the first in line to “take us on”. Right behind them are the Brazilians, the Indians, and, of course, the Russians, again. And, right behind them is a whole host of other nations.
The underlying story: the United States has not been challenged, financially as well as economically, in many years and has grown comfortable with its position as the Number One Player (NOP) in the World.
Plot line: the United States will not fall from its position as NOP but other countries are becoming relatively stronger, especially China.
Scenario: China smells weakness in the United States position. When an “opponent” smells weakness, that “opponent” steps up its game. Most experts expected China to “step up its game” at some time in the future, but they did not expect this behavior to happen so soon.
Response: the NOP calls “foul”! The first reaction of the NOP is to claim that the “opponent” is cheating or playing dirty. The NOP tries to get those on the sideline into the game in order to overcome the pressure that the “opponent” is applying to the NOP. China bashing has become de rigueur in the United States, especially for those running for office in this fall’s elections. (“China-Bashing Gains Bipartisan Support,” http://professional.wsj.com/article/SB10001424052748704689804575536283175049718.html?mod=ITP_pageone_2&mg=reno-wsj.)
Script: the battle goes on. This conflict is not going to be resolved this weekend. Nor is the conflict going to be resolved at the G-20 meetings in November. The conflict, for the time being, is going to be played out on the playing fields. The “opponent” is going to push the NOP and is going to hit the NOP on many different fronts.
For example, another move by the “opponent’ is the effort by the Chinese to make its currency, the yuan, more global. Last week, electronic trading of the yuan began. Further efforts are underway to expand this trading to banks in the United States and in Europe. (“Yuan Goes Electronic in Global Market Bid,” http://professional.wsj.com/article/SB10001424052748704011904575537754269611906.html?mod=ITP_moneyandinvesting_0&mg=reno-wsj.)
“China’s government has made a series of moves in the past year to encourage the yuan’s use outside China, an effort to become less dependent on the dollar for trade and investment. The moves are allowing pools of yuan to accumulate in bank accounts outside of China, particularly in Hong Kong.
Hong Kong banks have been trading the currency among themselves, but through over-the-counter trades where the banks contact each other directly or through brokers.”
This new move will mean that prices and trading amounts will be posted for all to see.
The effort to improve its relative position in the world is not going to stop. China is making efforts on many fronts to strengthen its position in the world. The contest is on.
Leaders in the Obama administration, from the President to the Secretary of the Treasury on down, are speaking out more forcefully against the actions of the Chinese.
World leaders are observing this conflict and are trying to keep the discussions civil and “in bounds”. This is why someone like the managing director of the IMF, Dominique Strauss-Kahn, as well as others, are attempting to temper the rhetoric and bring things into the existing organizations that deal with trade and international finance. (“IMF Chief Steps into Dispute over China’s Currency Policy,” http://www.nytimes.com/2010/10/08/business/global/08currency.html?ref=business.)
Players crying “foul” can only achieve so much. Sooner or later the NOP will have to modify its game plan and raise its play to another level. The “opponent” is not going to lessen its pressure as long as weakness in perceived in the NOP.
And, where does this weakness show? One very prominent place this weakness shows is in the value of the dollar. Since the early 1970s when the dollar was taken off the gold standard, the value of the dollar has declined by about 40%. Except for the “flight to quality” periods experienced during the financial unpleasantness of the 2008-2009 period, the dollar has continued to be in decline from the level it reached during the Clinton years. The international investment community is not “in love” with the fiscal and monetary policy of the United States government.
This contest between China and the United States is for real. The pressure from the Chinese is not going to abate anytime soon. The “rest-of-the-world” is not in any position to contain this conflict unless it shuts down world trade, something it will not do.
This means that the United States must get its act in order. The United States cannot compete with 20% to 25% of its industrial capacity not being used. The United States cannot compete with 20% to 25% of its labor force under-employed and not trained sufficiently to work in the modern economy. The United States cannot compete when its government creates incentives for people to protect themselves from credit inflation rather than engage in productive pursuits.
And, fiscal stimulus by the government and quantitative easing on the part of the monetary authorities will not correct these problems. They will only indicate to the Chinese how weak the United States has become.
This contest between China and the United States is for real. The only way the United States can “raise its game” is by focusing on what can make it more competitive. I don’t believe that the United States will ever again get the “free ride” it benefitted from over the past thirty years or so. So, the United States government must change the way it does business.
The Chinese are only the first in line to “take us on”. Right behind them are the Brazilians, the Indians, and, of course, the Russians, again. And, right behind them is a whole host of other nations.
Wednesday, October 6, 2010
United States Losing Financial Clout?
There are growing signs that the United States is losing its financial clout. One of these signs is the growing talk about adding other currencies to the list of currencies used as international reserves. The Premier of China has been raising this issue for quite a few months now. French President Nicolas Sarkozy gained attention last week by not only supporting discussions on the issue but also suggesting that France and China work together in developing such a change. The proposed venue: the upcoming G-20 talks in Seoul, South Korea.
There has also been talk within the International Monetary Fund about the need for change, both in terms of representation (the governing body of the IMF is heavily weighted toward the Europeans) and the makeup of international reserves.
The fact is that these initiatives are becoming more and more credible. A change is not imminent, but it is expected that discussions will grow about more co-ordination between countries or the inclusion of other currencies as international reserves.
The United States continues to attack the foreign-exchange policies of the Chinese, but Chinese leaders have worked hard behind the scenes to build relationships and to act in a way that is supportive rather than divisive. A recent example is the announcement that China will buy Greek government bonds to show support of the effort being made in Greece to restore confidence in the economic policies of that government.
“The U. S. plans to use IMF meetings and sessions of the Group of 20 in October and November as venues to coordinate international pressure on Beijing, rather than press its views unilaterally.” (See “IMF Talks on Currency Restraints,” http://online.wsj.com/public/page/news-business-us.html.)
Yet those that seemingly support a broader base for international reserves are getting most of the press and any real publicity condemning the actions of the Chinese appear to be mostly coming from the United States. The support the United States does get seems half-hearted, at best.
The United States seems to be losing its relative position in the financial world. Yes, it is still “Number One” but the fifty years of credit inflation that has weakened its economic base (http://seekingalpha.com/article/227990-monetary-warfare-can-nations-have-independent-economic-policies) coupled with growing strength in the emerging nations has resulted in changes in the relative position of countries in the world. The United States continues to act as if it were still the “sole act” on the stage, while many of the emerging nations, especially the BRIC nations, are finding their relative strength and their voice. (France’s Sarkozy, with no place else to go, seems to be leaning to the BRICs to show he still has some clout in the world.)
The growing conflict comes from the fact that the financial world has become increasingly interconnected. Capital mobility is greater now than many believed possible forty years ago. But, the existence of this mobility limits the choices available to countries: they can either have fixed exchange rates or they can have independent governmental economic policies.
Many, like the United States, have opted for independent governmental economic policies. This has resulted in the internal economic problems in the United States mentioned in the Seeking Alpha post cited above. The consequence of this has been a decline in the value of the United States dollar. Other countries have had to follow various paths in order to protect themselves from what they consider to be a “competitive devaluation” on the part of the United States.
These other countries are not particularly happy.
The call has gone out for nations to join in greater co-ordination: “the Institute of International Finance, the global top bankers’ club, is calling for renewed global co-ordination to address the trend towards unilateralism on macroeconomic, trade, and currency issues. Likewise, Chinese Premier Wen Jiabao has also been calling for global policy co-ordination.” (See the opinion piece by John Plender, http://www.ft.com/cms/s/0/295e207a-d09a-11df-8667-00144feabdc0.html.)
The likelihood of achieving some form of greater co-operation and co-ordination in the economic policies of member nations seems to be slim and none. This is especially true given the leanings of a majority portion of the voting body of the Federal Reserve System and the Chairman of the Bank of England concerning the use of “quantitative easy” to spur on their economies. In fact, the calls for greater “quantitative easy” at central banks has grown over the past several weeks which, of course, has had a negative impact on currencies.
In my view, we are in this conflict for the long haul. To me, the stage is set for the emerging nations to continue to press their point. There seems to be a growing sense their time is coming and that the United States is only going to become relatively weaker…although still Number One.
The model broke in the European sovereign debt crisis earlier this year and the European Union pulled together for a long enough period of time to keep things from totally falling apart. Some people had suggested that this European model of “coming together” be used in the G-20 and in the IMF.
I don’t think this is going to happen.
Greater global co-operation and co-ordination is going to have to come about someday. It is just not going to happen any time soon.
There has also been talk within the International Monetary Fund about the need for change, both in terms of representation (the governing body of the IMF is heavily weighted toward the Europeans) and the makeup of international reserves.
The fact is that these initiatives are becoming more and more credible. A change is not imminent, but it is expected that discussions will grow about more co-ordination between countries or the inclusion of other currencies as international reserves.
The United States continues to attack the foreign-exchange policies of the Chinese, but Chinese leaders have worked hard behind the scenes to build relationships and to act in a way that is supportive rather than divisive. A recent example is the announcement that China will buy Greek government bonds to show support of the effort being made in Greece to restore confidence in the economic policies of that government.
“The U. S. plans to use IMF meetings and sessions of the Group of 20 in October and November as venues to coordinate international pressure on Beijing, rather than press its views unilaterally.” (See “IMF Talks on Currency Restraints,” http://online.wsj.com/public/page/news-business-us.html.)
Yet those that seemingly support a broader base for international reserves are getting most of the press and any real publicity condemning the actions of the Chinese appear to be mostly coming from the United States. The support the United States does get seems half-hearted, at best.
The United States seems to be losing its relative position in the financial world. Yes, it is still “Number One” but the fifty years of credit inflation that has weakened its economic base (http://seekingalpha.com/article/227990-monetary-warfare-can-nations-have-independent-economic-policies) coupled with growing strength in the emerging nations has resulted in changes in the relative position of countries in the world. The United States continues to act as if it were still the “sole act” on the stage, while many of the emerging nations, especially the BRIC nations, are finding their relative strength and their voice. (France’s Sarkozy, with no place else to go, seems to be leaning to the BRICs to show he still has some clout in the world.)
The growing conflict comes from the fact that the financial world has become increasingly interconnected. Capital mobility is greater now than many believed possible forty years ago. But, the existence of this mobility limits the choices available to countries: they can either have fixed exchange rates or they can have independent governmental economic policies.
Many, like the United States, have opted for independent governmental economic policies. This has resulted in the internal economic problems in the United States mentioned in the Seeking Alpha post cited above. The consequence of this has been a decline in the value of the United States dollar. Other countries have had to follow various paths in order to protect themselves from what they consider to be a “competitive devaluation” on the part of the United States.
These other countries are not particularly happy.
The call has gone out for nations to join in greater co-ordination: “the Institute of International Finance, the global top bankers’ club, is calling for renewed global co-ordination to address the trend towards unilateralism on macroeconomic, trade, and currency issues. Likewise, Chinese Premier Wen Jiabao has also been calling for global policy co-ordination.” (See the opinion piece by John Plender, http://www.ft.com/cms/s/0/295e207a-d09a-11df-8667-00144feabdc0.html.)
The likelihood of achieving some form of greater co-operation and co-ordination in the economic policies of member nations seems to be slim and none. This is especially true given the leanings of a majority portion of the voting body of the Federal Reserve System and the Chairman of the Bank of England concerning the use of “quantitative easy” to spur on their economies. In fact, the calls for greater “quantitative easy” at central banks has grown over the past several weeks which, of course, has had a negative impact on currencies.
In my view, we are in this conflict for the long haul. To me, the stage is set for the emerging nations to continue to press their point. There seems to be a growing sense their time is coming and that the United States is only going to become relatively weaker…although still Number One.
The model broke in the European sovereign debt crisis earlier this year and the European Union pulled together for a long enough period of time to keep things from totally falling apart. Some people had suggested that this European model of “coming together” be used in the G-20 and in the IMF.
I don’t think this is going to happen.
Greater global co-operation and co-ordination is going to have to come about someday. It is just not going to happen any time soon.
Thursday, July 15, 2010
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.
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.
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