The G-20: Sound and Fury Signify Something in Seoul

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Seoul G20 summitOn the eve of an economic summit meeting of the G-20 world leaders in Seoul, South Korea, disturbing signs of discord are emerging over currency valuations and trade between the U.S. and its major trading partners. Failure to achieve an agreement could set off more "currency wars," in which nations try to drive down their currency's value to achieve an edge in global trading.

China gave contradictory indications of its stance on Nov. 9, lashing out at the U.S. for the Federal Reserve's policy of buying $600 billion in bonds to boost the economy. But it also raised the exchange rate of the yuan, its national currency, by the biggest amount since 2005 in an apparent effort to avoid a confrontation with the U.S. and European leaders on Nov. 11-12 in Seoul.

Germany, one of America's closest allies, has now emerged as its biggest critic on economic policy. German Chancellor Angela Merkel dismissed a U.S. proposal to set maximum targets for trade surpluses, which had been agreed to at a meeting of finance ministers in late October, but has now been abandoned by U.S. Treasury Secretary Timothy Geithner. Germany has one of the biggest trade surpluses in the world economy.

"Clueless"


"I don't think much of quantified balance of payments targets," Merkel told the Financial Times, warning that the world economy faces a danger of protectionism, a clear reference to efforts in the U.S. Congress to curtail imported goods.

Only a day earlier, German Finance Minister Wolfgang Schaeuble had criticized the American economic policy as "clueless." "It doesn't add up when the Americans accuse the Chinese of currency manipulation and then, with the help of their central bank's printing presses, artificially lower the value of the dollar," Schaeuble told Der Spiegel magazine.

That caustic attack suggests that no deal has been reached in advance of the Seoul summit.

China and a number of emerging-market countries, such as Brazil, have accused the U.S. of undermining their currencies via the bond purchases known as quantitative easing. Those purchases have driven down the value of the dollar, which means emerging-market currencies are shooting up in value. That makes their exports less competitive and attracts "hot money" investments into their economies, which can cause inflation.

China and Taiwan imposed new capital controls on Nov. 9 in an effort keep the hot money out, joining Brazil, which last week raised taxes on foreign investments as a way of discouraging foreign capital inflows.

"Emerging economies are seeing large capital inflows and face mounting inflationary risks," says Chinese Vice Premier Wang Qishan. "There is excessive liquidity in the world and fluctuations in international financial markets. All of these are dampening market confidence."

Common Approach Now, Details Later

Geithner, who had been sure his proposal on limiting budget surpluses to 4% would be accepted at the G20, had to make a face-saving retreat. He told reporters in Tokyo that the U.S. won't use the dollar as a trade weapon and that he still supports a strong U.S. currency, despite evidence that the Fed move undercut the greenback's value in an effort to boost American manufacturing exports.

"We will never use our currency as a tool to gain competitive advantage," Geithner said. He added that he thought the leaders gathered in Seoul on Thursday would simply agree to work toward a common approach and leave details to their finance ministers to work out later.

China seemed to be hedging its bets before the meeting by allowing the yuan to rise 0.51% in a single day of trading. That was the largest advance since China dropped its explicit peg against the dollar in 2005. Beijing has been widely criticized, not only in the U.S. but around the world, for keeping its currency artificially low. That has damaged its trade balance with the U.S. and Europe, and also with other Asian countries, such as Thailand, that having floating currencies.

Gold? No. Capital Controls? Yes

One proposal to deal with the current currency crisis came from World Bank President Robert Zoellick, who suggested in an op-ed piece in the Financial Times this week that the G20 should consider using gold "as an international reference point of market expectations about inflation, deflation and future currency values."

But that suggestion flopped, with European Central Bank President Jean-Claude Trichet rejecting the idea as outdated, and several economists pointing out that the gold standard was one of the main causes of the 1930s' Depression.

A more likely solution came from another World Bank official, Sri Mulyani Indrawati, who said Asian countries might have to adopt capital controls to counteract quantitative easing's likelihood of causing asset bubbles to rise in developing countries.

"Certain assets will become, potentially bubbles," Sri Mulyani told Bloomberg news. "The quantitative easing will create a lot of liquidity flooding to the East Asia Pacific region, because it is the most dynamic and attractive with a higher return on investment."

Rate Hikes Aimed at Bubbles


China also took more efforts aimed at curbing currency inflows, requiring banks to hold more dollars and tightening controls of foreign equity investments in China as well as on Chinese overseas special-purpose vehicles.

Analysts have pointed out that real estate in China, Hong Kong and Australia has already reached the bubble stage, with other assets likely to follow. China has raised interest rates in an effort to ease the real estate bubble, and more interest rate increases may soon be forthcoming.

The lack of agreement ahead of the G20 suggests that individual nations will be forced to take more action to insulate their economies from the effects of inflation, which the Fed's bond-buying program may touch off.

After last week's Republican victory at the U.S. polls, President Obama made clear that he'll do everything he can to support job creation in the U.S., including measures to boost exports. He has called for exports to double in the next five years, something that will be possible only if the dollar declines sharply against other currencies.

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11 Comments

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wwj745

I do not know why some of you are whining. You get the government you deserve. After decades of electing the "lesser of 2 evils". How is that working out? Until the people of this Country wise up. We will continue down the toilet.

November 11 2010 at 2:44 AM Report abuse rate up rate down Reply
weathwoods

Aren't you glad we defeated Japan in WWII? China is such a good friend of ours now.

November 10 2010 at 5:40 PM Report abuse +2 rate up rate down Reply
weathwoods

Screw David Rockefeller and his global economy. First we must eliminate the Federal Reserve, but with the poor state of education in this country, that is a daunting task.

November 10 2010 at 5:38 PM Report abuse +3 rate up rate down Reply
michaelkrigstein

YOU KNOW WHO IS CLUELESS?? EVERYONE EXCEPT THE CHINESE. HEY EVERYONE, DID ANYONE LOOK INTO THE PRICE OF POLYESTER AND COTTON. DOES ANYONE KNOW THAT THE CHINESE WENT TO S KOREA AND BOUGHT UP ALL THE POLY YARN. PRICES ARE GOING UP 10% A DAY. A DAY!!!!!! WAIT UNTIL 5 MONTHS FROM NOW WHEN CLOTHING PRICES IN THE U. S. AND AROUND THE WORLD GO UP 50 -100%. SO THAT $9.00 TEE SHIRT IS $18.00 AND THAT $20 SHIRT BECOMES $40. THE CHINESE LEARNED FROM ENRON AND ALL THE GUILTY GIANTS THAT PRACTICE THE UGLY UNDERBELLY OF CAPITALISM.

November 10 2010 at 11:36 AM Report abuse +3 rate up rate down Reply
bohemianacres

When there is a global recession as there is, was, will be again, all major countries do the "Currency Jig". It is no surprise what the U.S. did and what the Chinese did, and what Germany did, etc. etc. etc. And in the meantime gold is shoved off the plate. However, I think that is what is happening under the table. Gold is being hoarded, as we have seen with the very public India's big grab recently. As far as G-20, there will not be any common or general policies coming from it, unless "Every Country For Themselves" is such a policy. And with the "Do-Nothing" Congress we just elected, it will be everybody for themselves also, for at least two more years.

November 10 2010 at 10:47 AM Report abuse +4 rate up rate down Reply
graftforyou

When you send a community orginazer to do a presidents job dont expect too much. This is just another vacation for the king and Queenie

November 10 2010 at 10:46 AM Report abuse +4 rate up rate down Reply
1 reply to graftforyou's comment
cross61roads

Oh really Goober...............Wait till the flock of inbreads that were just elected put us into a depression next year...............Then again you work at Buger King what do you know..............

November 10 2010 at 6:51 PM Report abuse rate up rate down Reply
Maryanne

Once again - it is time to get rid of the Fed - they should be audited, and Berwacki should be gone. He and Obama are bent on hell to destroy this great nation

November 10 2010 at 8:27 AM Report abuse +10 rate up rate down Reply
1 reply to Maryanne's comment
weathwoods

The Fed was created in 1913, by the Rothschilds, Paul Warburg, the Bank of England, Chase Bank (Rockefeller), JP Morgan, and Nelson Aldritch (Republican Senator from Rhode Island and banker. His daughter married John D. Rockefeller, Jr. and among their kids was Nelson A. Rockefeller and David the Globalist). Add to this the Federal income tax and our entry into the Great War, and you have a large national debt. Who pays the interest on this debt? We the taxpayers. Who collects? The member banks of the Fed, who loaned the gov't the $$ to pay for the war. How did the banks sucker the American people into supporting this monstrosity? It was easy. The very banks that wanted a central bank, publicly opposed it, and Americans said to themselves, "If the banks are against it, it must be good for us." Americans: stupid then, stupid now. The doughboys couldn't even get full value on the war bonds they bought, once they redeemed them at the banks. But they sure looked snappy in those uniforms, didn't they? (Over there, over there; the Yanks are coming, etc.)

November 10 2010 at 5:52 PM Report abuse +1 rate up rate down Reply
marine1942

Not to worry, remember Obama said he was going to make all countries like us

November 10 2010 at 7:38 AM Report abuse +8 rate up rate down Reply
1 reply to marine1942's comment
Maryanne

Actually he wants to make our country like the other countries

November 10 2010 at 8:26 AM Report abuse +6 rate up rate down Reply