Farrell: G20 Follow—Why Bother?
Chief Investment Officer, Soleil Securities
A decaf latte with skim milk and artificial sweetener is called, in some places, a why bother. No caffeine, no fat, no sugar—why bother? It would be too much to say the meeting of the G20 finance ministers this past weekend was a complete why bother, but, in my eyes, close to it.
Led by Tim Geithner, nations considered putting limits on their current account balances. I am about to lose all of you right about now. Current account balance is not a phrase used in polite conversation all that often. Most of us know what a trade balance (or deficit) is and a current account balance is the broadest measure of a nation's trade and investment balances. Leave it at that for our purposes.
U.S. officials wanted G20 members to commit to targets for their current account trade balances.
The US has a big deficit.
China, Japan, and Germany, for example, all have surpluses. The US wants nations to consider pursuing policies to maintain balances at "sustainable levels."
But to commit to levels has implications for the value of a country's currency. China is currently running a current account surplus of about 4.7% of GDP, according to Saturday's Wall Street Journal. Germany is running at around 6%, and Japan at 3%. The United States has a deficit of 3.2%. The International Monetary Fund figures that China, if unchecked, will rise to an 8% surplus by 2015. Unofficially, the US is lobbying for a 4% limit. But there would be no mechanism for enforcement; only oversight by the IMF. Peer pressure would be the great equalizer (therefore, why bother?).
Policies to rebalance would be "exchange rates, cuts in budget deficits, and changes in regulations and taxes," says Evan Ramsted and Bob Davis in the Journal. For the US to shrink its deficit, it would have to export more and import less—which means US consumers would have to be discouraged from buying imported goods. The best way to do that would be to tax the imports. Hello, trade war! And a weaker dollar would be needed to make imports more expensive. A weaker dollar would make US exports more affordable and, therefore, more attractive to the foreign market. China would have to let the Yuan rise in value.
China has been very vocal about the US pumping cash into the financial system thus creating volatile capital flows. The US has criticized China's large trade surpluses for the past decade. China answers, according to the Financial Times, by saying its own economic stability depends on "gradual reform of currency policy and the jobs created by exporters." That last argument is a sticking point. China claims that many of its exporters operate on very thin margins (probably true), and rapid currency adjustments would create large-scale unemployment. Timmy thought of that beforehand in a letter circulated before the meeting, saying countries "with significantly undervalued currencies and adequate reserves should allow their exchange rates to adjust to levels consistent with economic fundamentals." Why bother, Tim? China politely disagrees, and we are about to launch another round of Quantitative Easing which will probably weaken the dollar further. It seems to the rest of the world that we want to win the export war by devaluing. OK for us to do so, not OK for you. No easy answer here.
Vincent Farrell, Jr. is chief investment officer at Soleil Securities Group and a regular contributor to CNBC.