We are one week away from the G20 Summit in Pittsburgh and the rhetoric from the members is escalating. Normally, the G20 finance ministers work out the details of what will be discussed and then the summit rubber stamps them. As I warned earlier, a policy food fight was brewing and now the pies are hitting the faces.
Yesterday, the Obama administration along with European governments are seeking to reach a new agreement on a framework to deal with the massive global imbalances. According the FT , the goal is to achieve both a basic agreement on what needs to be done to produce more balanced global growth and a process for ensuring that countries deliver on their commitments. The tire tariff is another part of this policy direction that the US and perhaps EU will pursue.
I think we all know the major players when it comes to massive imbalances. I think we all know that the US consumer is not going to consume at their previous rate. I think we all know that the world would like China to increase domestic spending and consumption.
Last night, Canada's PM Harper had these direct comments: Any proper approach to free trade should focus not just on lowering barriers to trade but also on having flexible exchange rates. Without naming China, which has resisted floating currency rates, he said a flexible regime was the only way to prevent unsustainable imbalances from growing in the economy according to Reuters. (Okay, he did make some comments about swimming naked and Warren Buffet as well, but that's a distraction.)
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The Chinese responded by deflection and skepticism. The Chinese ambassador to Washington, Zhou Wenzhong, said, "“People should not focus on only one thing, that is balancing the economy.” He pointed out that the IMF should concentrate on doing a better job of monitoring the build-up of financial risks. Watch this theme of the IMF importance to play out more and more in global trade.
The funding of SDRs by the Chinese is indicative of their belief that the IMF should be more of a force. There is a developing theory that the IMF could eventually morph into a global central bank and oversee a paradigm shift for global finance. One of the biggest changes would be an alternative to the US dollar as a the global reserve currency. However unless the Chinese make their currency convertible and begin to run current account deficits, this will never happen.
So as the G20 summit hits next week , the common thinking is that nothing of importance will be decided. The truth is that the US/EU want China to stimulate domestically so they can increase exports to China. The best way to do this is to have the purchasing power of Chinese consumer go up. The best way to do that is to have the yuan strengthen.
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