As we have discussed in previous articles, our fears relating to the lack of political will or statesmanship are seemingly coming true. Our global leaders seem to be struggling at the G20 summit when it comes to the subject of currency imbalances.
Consider these facts reported by the Telegraph UK …..With China resolutely refusing to allow the yuan to rise more quickly, the US shifted the debate on the first day of the G20 summit to address trade imbalances, the root issue behind exchange rate clashes.
Timothy Geithner, the US Treasury secretary, told G20 members they should commit to specific trade caps, allowing surpluses and deficits on their current account, the broadest measure of trade in goods and services, to be no more than 4pc of gross domestic product.
China’s current account surplus was 5.9pc in 2009, having almost halved from its peak of 10.6pc in 2007. The US, by contrast, had a current account deficit of 3pc last year. In a letter to the G20, Mr Geithner called for a “co-operative effort” on the issue, but said there would have to be “some exceptions” for countries that imported large quantities of raw materials.
The US plan was seen as a way to side-step a direct confrontation over currencies. It was backed by the UK, Korea, Australia and Canada, but immediately opposed by large exporters such as Japan and Germany. Rainer Bruederle, the German finance minister, rejected a “command economy” approach, while Yoshihiko Noda of Japan said “setting numerical targets would be unrealistic”.
India also said the trade caps would be hard to work out, while Russia said there would be no numerical limits set in the summit’s final statement. Mr Geithner also called for G20 countries to refrain from “either weakening their currency or preventing the appreciation of an undervalued currency”. Mr Geithner, who also called for the IMF to monitor the G20’s commitments, added: “G20 advanced countries will work to ensure against excessive volatility and disorderly movement in exchange rates.”
Guido Mantega, the Brazilian Finance minister, who was not at the G20 summit, also revealed the Mr Geithner had telephoned him to reassure him that the US had no intention of allowing the dollar to weaken further. “He guaranteed US policy is not to weaken the dollar, on the contrary, it is to strengthen the dollar,” said Mr Mantega. “He said the impact of the Fed policy was being overestimated. It is difficult, if you weaken the dollar and want the Chinese to let the yuan appreciate,” he added.
However, as the first day of meetings closed, there was little sign that currency issues would be resolved. With scepticism growing that the G20 was a focused enough forum to iron out global economic problems, Lee Myung-bak, the South Korean president who is hosting the summit, warned ministers that if they did not reach a compromise “we may not operate bus, train or airplane services to take you back home”.
In a final statement after two days of heated negotiation, the G20 said it would “move towards more market-determined exchange rate systems” and that the International Monetary Fund would “deepen” its supervision of exchange rates.
“This language calms everything down and gives us a route map forward,” said George Osborne, the Chancellor of the Exchequer. “Obviously this colorful language about currency wars has got everyone excited,” he added.
Mr. Osborne clarified, however, that the statement was not a criticism of China for persistently undervaluing the Yuan. “What people have been nervous about is that the current imbalance would get worse as countries other than China look at the route of competitive devaluation.” He also said that while currencies “tend to grab the headlines”, they are just one part of wider economic imbalances.
While several member countries of the G20 hailed the summit in South Korea as a success, Japan immediately broke ranks to declare that, contrary to the spirit of the communique, it would continue to devalue the yen if it saw fit. Yoshihiko Noda, Japan’s finance minister, said: “A prolonged appreciation in the yen is not good for Japan’s economy. Our stance, that we will take appropriate, bold action if needed, is unchanged.”
From all of this, the thing we need to fear the most is an outbreak of currency devaluation to counterbalance China’s refusal to let the Yuan finds its place in the market. This could have disastrous effects on already stressed economies.
While a little inflation and growth would be a good thing, hyperinflation would be devastating to the US and EU economies that are at best still on their knees. Relate this also to the fact that most of these nations have committed to rather severe austerity programs and the temperature in the pot will go up a few degrees I fear.
It is no secret that for months now that predictive linguistics has pointed to a major event that has been anticipated within the first 15 days of November. Most recently, it seems to somewhat focus on the global economy. PAY ATTENTION, very close attention to these events now unfolding.