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G20: skating on the surface « Previous | |Next »
November 10, 2010

The G20 meets in Seoul, South Korea, this month. The continuing agenda is global recovery, rebalancing growth, financial regulatory reform and governance reform at the International Monetary Fund—plus the two new issues added by the Korean hosts: financial safety nets and closing the development gap. The agenda is whether a new international order can be created that would move from the framework established after World War II in which the Group of Seven advanced economies managed the world economy.

The reality is that the G20 is a self-appointed body that has little legitimacy, has achieved precious little since it started holding two yearly summits two years ago, and it provides a better forum for the powerful to pursue their own agenda.

The conflicts over achieving a strong, balanced and sustained world recovery will surface at the G20 in the form of the "currency wars":

PinnICurrencywars.jpg


The background is multilayered:

(1) The political background is visceral public anger towards banks, the activities of which severely damaged the real economy to the extent that full recovery will take years.
(2) The US is juggling the agenda to support US economic growth and job creation through US dollar depreciation at the expense of East Asian economies and oil and commodity exporters.
(3) The economic background is that the core of the world’s financial system has become unstable, and reckless risk-taking will once again lead to great collateral damage.
(4) The secular decline in economic growth rates and the long-run increase of financial fragility and instability.
(5) Financialization, or the shift in the center of gravity of the capitalist economy from production to finance, is a compensatory mechanism to a long term decline in growth that has helped to lift the economic system under these circumstances, but at the expense of increased fragility.
(6) a rapidly growing industrial base in emerging markets is being hard-wired to intensive use of coal. This, coupled with the reliance on cheap local coal in the US and Australia, will make it exceedingly difficult to reverse the trend in the future.

My view is that the US's trajectory of slow growth means that it will be forced to curtail its international commitments. This will create space for rising powers like China, but it will also expose the world to a period of heightened geopolitical uncertainty.

The trajectory is one of decline for the US because its political elite is failing to develop a coherent policy response to the global financial crisis as it is being forced to choose between job creation, which requires a more competitive exchange rate, and cheap financing of its external and fiscal deficits.

This is a political failure in that its political parties, rather than working together to address pressing economic problems, remained at each other’s throats. The country is turning inward, and its politics is becoming more fractious, its policies more erratic, and its finances increasingly unstable.

Update
Martin Wolfe at the Financial Times says that the Federal Reserve's attempts to reflate the American economy through low interest rates and pumping more money into the economy will encourage capital to flow into countries with less expansionary monetary policies (such as Switzerland) or higher returns (such as emerging economies or Australia). He adds:

Recipients of the capital inflow, be they advanced or emerging countries, face uncomfortable choices: let the exchange rate appreciate, so impairing external competitiveness; intervene in currency markets, so accumulating unwanted dollars, threatening domestic monetary stability and impairing external competitiveness; or curb the capital inflow, via taxes and controls. Historically, governments have chosen combinations of all three. That will be the case this time, too.

The US, one way or the other: it will either inflate the rest of the world or force their nominal exchange rates up against the dollar.

| Posted by Gary Sauer-Thompson at 11:33 AM | | Comments (9)
Comments

Comments

Intersting the above comments. Elsewhere it's been proposed that the US is likely to become more bellicose, as the republican populists gear up for a shot at thepresidency in a couple of years. Then, we are told exponentially worse to follow, as the hard right gears up for a new Bush era, this time on steroids.

The central split in the world economy is between the countries with a trade surplus (Germany, China, Japan) and those with a trade deficit (The US, UK, Spain, Portugal, Italy). The former export more than they import and so need to lend to the rest of us in order that we can afford to buy their stuff.

The Germans ire has been raised by an American request that the countries with large trade surplus voluntarily agree to limit those surpluses to less than 4% of GDP. The Germans (and the Chinese) find this intolerable. It will cost them jobs and limit their growth.

Ireland is in a real bad a way.

the main challenge is rebalancing global demand so that it relies less on overindebted America and more on domestic spending in vibrant emerging economies, particularly China.

Gary, what are the prospects for an end to the US's recession, then?
Is there no way the less well off there can avoid being squeezed till the pips pop, to pay for the rout?
Doesn't look like too good a time to be a loser, to put it harshly.

Paul,
it doesn't look good for the US. Paul Krugman in the New York Times says:

the aftermath of major financial crises is almost always terrible: severe crises are typically followed by multiple years of very high unemployment. And when Mr. Obama took office, America had just suffered its worst financial crisis since the 1930s. What the nation needed, given this grim prospect, was a really ambitious recovery plan.

According to Robert Reich in his America's Two Economies post on his blog:
the American economy has lost 15 million jobs since the start of the Great Recession. And if you add in the growth of the labor force – including everyone too discouraged to look for a job – we’re down about 22 million.Or to put it another way, we’re still getting nowhere on jobs.One out of eight breadwinners is still out of work. Most families in the Average Worker economy rely on two breadwinners. So if one out of eight isn’t working, chances are high that family incomes are down compared to what they were three years ago. And that means the bills aren’t getting paid....Most people in the Average Worker economy own few shares of stock, if any. Their equity is in their homes. But with all the delinquencies and distressed sales, the housing market has a glut of homes for sale. As a result, home prices are still dropping. So the net worth of most Americans is still dropping.

The US never got a truly adequate economic plan is Krugman's argument. The debt moralizers saw to that. So the slump will go on and unemployment will remain high. But Wall Street is doing great.

paul,
the promise of "greening the economy" as a multifaceted solution to a host of major problems -- a way to halt the decline of the American manufacturing sector--hasn't really happened.

Amercia, the land of free enterprise and free trade is now proposing trade restrictions.

This is not Congress, it is Treasury Secretary Timothy Geithner writing one of his notorious letters to his G20 colleagues last month calling for big export nations to reduce their trade surpluses.

This South Centre Report on the global financial system, which was authored by Yilmaz Akyuz, the centre's chief economist, points out that:

• There are no effective rules and regulations to bring inherently unstable international financial market and capital flows under control.

• There is no multilateral discipline over misguided monetary, financial and exchange rate policies in systemically important countries despite their strong adverse international spill-overs.

• National and international policymakers are preoccupied primarily with resolving crises by supporting those who are responsible for these crises, rather than taking measures to prevent their recurrence. Through such interventions they are creating more problems than they are solving, and indeed sowing the seeds for future difficulties.

• The IMF is being given much more capacity to bail out indebted countries – but this is misguided, because its role should be to prevent crises and there is an urgent need instead for an international debt work-out mechanism.