Wednesday, November 10, 2010

G-20, currency wars and Obama's soothing letter ?

Follows along the line of yesterday's post-
The global currency wars, quantitative easing and a new global currency have made for tensions at the G-20 meeting in South Korea.

The Seoul summit comes as global co-operation is at its weakest since the financial crisis began and a global “currency war” is the hot topic.

India's Prime Minister says the G-20 is in serious difficulties. Mervyn King, Bank of England governor, said the spirit of co-operation from 2008, “so strong then, has ebbed away”
G-20 countries are unable to agree on much of anything.

QE2, the US acting alone, fuels speculation that the US is attempting to devalue the dollar in a stealthy fashion (which it is) Also the flooding of foreign markets with US dollars will lead to rampant and wild speculation (creating bubbles) and the destabilization of emerging economies.

So President Obama has sent a letter. A letter aiming to calm tensions

Mr. Obama tried to calm the currency tensions that have roiled global economic relations, though he did not mention by name the two most prominent sources of the tension: China’s foreign-exchange interventions and the Federal Reserve’s recent decision to inject $600 billion into the economy.
In an op-ed article for the Asian edition of The Wall Street Journal, the Treasury Secretary, Timothy Geitner, joined Tharman Shanmugaratnam, the finance minister of Singapore, and Wayne Swan, the treasurer of Australia, in warning that a “two-track recovery will dominate the global economy for a long time to come” and will require new forms of cooperation.
Together, Mr. Obama’s letter and Mr. Geithner’s article laid out a strategy that combined an appeal to reason, an avoidance of confrontation and more than a little humility. The benefit of their approach, they said, would be higher overall growth in the long term.

But it remained to be seen whether China and Germany, the world’s two most powerful surplus economies, would take steps to curb their reliance on exports and their high rates of savings and to increase their relatively low consumption, as American officials argue is needed. In the run-up to the two-day meeting that begins Thursday, officials from both nations unleashed stinging criticism of the Fed, accusing the United States central bank of essentially playing tricks with its economy to prop up a flagging recovery.

Mr. Obama’s letter indirectly defended the Fed, buttressing his argument that the world needs a robust United States recovery even though it should no longer depend on the American consumer to serve as the mainstay of demand.

Despite the conciliatory tone, it remained far from clear how much Mr. Obama and Mr. Geithner’s message would affect the final G-20 communiqué.

Either directly or indirectly the Obama administration still defended the actions of the Fed.
These actions are indefensible in the eyes of the world and specifically China and Germany.
The US is deflating it's debt away. This article explains the difference between inflating and deflating debt away.

Who Benefits From Deflation?
  • Those with no debt, few assets, and enough current income to get by nicely.
  • Those with no debt and lots of cash to get by nicely.
  • Those with a ton of debt and enough credit to be able to refinance that debt at much lower rates.
The government fits in that latter category.

I was going to try to explain this but, I will let someone else explain the benefits of dollar deflation. By reducing the value of the currency, the US reduces the real dollar amount that is owing. The intentional downward push on the US dollar is going to make life worse for the citizens of the US. The flooding of foreign markets with US currency will make life worse for citizens of many other nations. Either way the Fed does not seem to care and the administrations defends it's actions.

I am including a brief video with Michael Hudson which covers G-20, currency wars and more

Will China bail the US out as Japan has done?


  1. It is clear that countries such as China or Germany are concerned about the decisions taken by the Fed. A weaker dollar also discourages net inflows of foreign financial capital and it may pose a threat to the growth of the Chinese economy which is happening at such a fast pace now. But I think the decisions of the US government are crucial to give the economy a boost needed to achieve a full recovery.

  2. Hi Lorne:
    sorry for the tardiness, I haven't had a minute all week-end to get back here.

    I am going to agree to disagree with you here

    "But I think the decisions of the US government are crucial to give the economy a boost needed to achieve a full recovery."

    I do not think this is about full recovery, this is really economic warfare.

    If the US wanted economic recovery, they need to get their population back to work.
    Building from the foundation upward.
    This massive dollar dump on the global economy will accomplish nothing in the way of putting people back to work.

    It deflates the deficit and allows for continued speculation and the buying of other people's(nations) assets.

    Full recovery is not on the mind of the banks or the US government.

  3. The G-20 has diverted its attention from fiscal policy. However I am a bit optimistic here - the need to resolve balance of payments problems has left everyone making a suboptimal choice. Some nations have felt confident and have stimulated their economies by relaxing fiscal policy. However even they may have to worry about the external sector soon. Probably they have already started worrying. Nations have to come together at some point and agree upon new ways to do international trade and in some sense its good that its happening now. Its unfortunate that its happening at the cost of keeping the fiscal policy tight.
    Global currency wars