The G-20 puts spotlight on central banks

As a host country, China and its central bank were naturally center stage at last week's G-20 meeting in Shanghai.

But looking at some of the latest numbers, one may be tempted to conclude that the Fed was the real star of the conference on international economic policy coordination.

The growth of America's gross domestic product (GDP) in the fourth quarter of last year was just revised up to an annualized 1 percent from an earlier reported 0.7 percent. And these good growth dynamics carried over into this year: A high consumer confidence and rising employment, wages and salaries continued to boost the household spending, which accounts for 70 percent of the U.S. economy.

There was enough there to cheer up export aficionados in Shanghai. They are looking for another good year, after an $800 billion U.S. contribution to the global economy in 2015. That is how much America bought more than it sold to the rest of the world.

Briefly put, nobody in Shanghai could say better.

And nobody could deny that America's good economic performance was a result of Fed's efforts, because the U.S. fiscal policy has been in a tightening mode over the last five years.


China questions answered?

China most probably would be the first to agree with that. In the last two years, that nicely growing U.S. economy gave China a total of $709 billion in trade surpluses – a number that keeps the frontrunner in Republican primaries screaming "they are eating our lunch." To infuriate him further, somebody could also tell him before next week's Super Tuesday primaries that the Chinese can now cook that lunch with the finest U.S. kitchen appliances they acquired last January by recycling the greenbacks they got from export sales.

At any rate, the Chinese used the Shanghai forum to reassure the world that they would (a) keep the economy growing somewhere in the 6.5-7.0 percent target range, (b) continue to implement structural reforms, (c) increase private consumption of goods and services and (d) allow market forces to determine the yuan's exchange rate.

And in case anybody had any doubt about that, the People's Bank of China (PBOC) talked confidently about debt problems and its ability to manage them in a stable and orderly manner. The PBOC also renewed its assurances that it had all the room and instruments it needed to support economic growth, implying that it would fully cooperate in the financing of the announced fiscal easing.

The conclusion at this point is that the international policy coordination will crucially depend on ample liquidity provisions by the Fed and the PBOC.

Where was Mario?

There, however, was one regrettable and conspicuous absence in this discussion. I, of course, stand to be corrected, but I gave up looking for media reports on what the European Central Bank (ECB), or the EU, had to say in this important debate.

All I saw coming from the euro area over the newswires was the German finance minister's short message he could have sent via an sms from Berlin to save taxpayers' money he refuses to spend in support of the teetering European economic and monetary union.

Let's remind ourselves that the ECB controls, directly and indirectly, a currency area that represents about a quarter of the world economy. That is much bigger than the U.S. or China, whose shares in the global output amount to 16.4 percent and 16.5 percent, respectively.

Should Germany – which accounts for only 3.5 percent of the world economy – be allowed to speak for this vast European economic system? And to do that in magisterially scolding terms that it is time to stop supporting economic activity through public debt financings? In other words, everybody should be running budget surpluses. Just like Germany did last year, generating a 19.4 billion euro ($21.25 billion) bounty, the largest since the country's reunification in 1990.

The irony is that the G-20 should have taken Germany to task for destabilizing the euro area – and much beyond – by refusing to stimulate its domestic demand in order to buy more from its hard-pressed trade partners. Instead of doing that, Germany is living off the rest of the world with a $280 billion trade surplus, a whopping 8 percent of its GDP.

With that kind of record, it takes some chutzpah to lecture the world at a forum devoted to the balanced growth of the global economy through international policy coordination. But, sadly, there is nothing new about that: Germany has been getting away with this kind of posturing ever since the early 1970s.

And, true to form, Germany's assault on fiscal policies in Shanghai is a dig at the ECB. Berlin is accusing the ECB of helping the struggling euro area countries with its large bond purchases. That is wrong, the Germans say; they want these countries to bleed some more by going back to the punishing fiscal austerity and Germany's oxymoronic "austerity growth model."

Investment thoughts

The G-20 is the world's principal economic forum, where multilateral discussions about the international economic policy coordination are supposed to lead to a more balanced and sustainable growth of demand, output and employment.

As in the past, the group's meeting in Shanghai last week left the task of economic stabilization firmly in the hands of major central banks.

That certainly is the case of the U.S. The Fed will continue to be the main source of support to an economy where the fiscal policy remains virtually frozen with a restrictive bias.

China, by contrast, looks set to operate on all three policy levers: credit conditions, structural reforms and fiscal easing, with the PBOC driving the whole process of demand management.

The EU? It's easy to be negative on the world's largest economic system. I believe, however, that the Europeans will eventually step back from the precipice of disunion. The ECB's President Mario Draghi may be able to keep the Europeans together until the new generation of leaders takes over and heeds the emphatic call of the former French President Mitterrand in his farewell speech to the European Parliament: "Ladies and Gentlemen, build a united Europe because nationalisms mean war …"

Easy monetary policies will be good for equity markets. That optimism, and the one you just heard from Omaha, are matters of pure coincidence. But this is not coincidence: We both believe in the actual and potential growth of American economy.

And here is my personal rider: I hope that the Fed will follow sound monetary policies instead of ideological blunders that led to the last financial crisis and the Great Recession.

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