Farrell: G20 is Now the G19
Often when troubled domestically, leaders take off for overseas where the reception is often gentler and more accommodating. But that's when you are the big dog. When the world starts to view you as an afterthought, there is no respite. After a thorough drubbing in the midterm elections, President Obama turned his attention to the G20 meeting in South Korea where the United States has always held sway.
Washington's latest plan was to correct the imbalances in the world economy by focusing on current account surpluses and deficits. Treasury Secretary Geithner tried to convince the world to set numerical targets for such issues. A few weeks ago there was polite listening, but that was before the election and before Ben Bernanke detailed his quantitative easing program and the $600 billion he said he would pour into the US economy. The world feels that it is simply a blatant attempt to weaken the dollar and capture export markets, and they want no part of it. China found itself defended by others despite its currency manipulation.
To rub salt in the wound, a long pending trade pact with host country South Korea did not get signed. South Korea had signaled it was eager to use its temporary Presidency of the G20 to style itself as a leader on the world economic stage. To fail to agree on a trade pact is uniquely disappointing and can be viewed through the lens that is marked by a Republican Congress that South Korea might prefer to deal with.
To fail at the trade pact and to have, at best, a thinly disguised semi-hostile communiqué mark the end of the G20 meeting almost makes it look like the rest of the world sees itself as the G19 and the US as "them". The world leaders did not resolve the currency wars that are brewing or make progress on fiscal policy, financial regulations, or free trade (or unfree trade either). Leadership is needed to accomplish such difficult goals, and leadership was conspicuously absent from the meeting.
And if you go searching in the Euro zone for some stand up guys, you are going to be disappointed. After a depressing week in the Euro bond market, the leaders caved. Angela Merkel of Germany had insisted existing bond holders feel the pain of any sort of bail-out of a country's debts. So if Ireland turned to the EU, as looks increasingly likely, current bondholders would get a haircut to be bailed out. That sent the bond market lower and by the end of the week, the Germans had been forced to back off.
The finance ministers of the five largest Euro states - Germany and France included - issued a week end statement that any plans to force investors to bear the burden of future sovereign bailouts would not affect current bondholders. So, no pain. How likely is it that anyone will believe they won't get bailed out again ? And again ? Sooner or later, the pain has to be felt.
To all the world it looks like the Federal Reserve is trying to debase the dollar to juice up exports. If so, the Fed may have to rethink its strategy. Despite the prospect of dollars flooding the world markets, the dollar has rallied since the Fed announced its strategy. And, the bond market has reacted the opposite direction of what would have been expected. While true that renewed Euro zone fears have played their part and driven some to the perceived safety of the dollar, others are starting to think the markets are jumping the Fed's move and anticipating a stronger US economy.
QE 2 in other words, is priced in, and growing optimism about future US growth could replace the fear that has persisted, and the dollar could rise on such hope. The bond market could also see higher yields. Certainly, in the recent short run that is what has happened. If the euro zone crisis were to deepen (which looks likely with Portugal now in the cross hairs), a greater number of emerging economies will resort to currency controls to curb hot money inflows. The dollar would move even higher in such a scenario. So, to repeat last weeks observation, Ben is having a QE 2 party and no one is coming!