The G20 at the time of the currency wars

Oscar Ugarteche

05/11/2010

Opinión

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The previously existing world power structure is all but over. The world resulting from the Pax Americana of 1944 and expressed in the G7 group of countries now has to confront the fact that it no longer controls most of world GDP and that by 2016 it will be in a minority position in terms of total GDP. This means Europe as a whole will have to redefine its global role and that the United States will no longer be able to act unilaterally in the economic front.

In face of this, Asia has a new role to play in helping to ensure international economic and financial stability in the face of mature economies that need to devalue in order to import less and export more. The beggar thy neighbour policy again deployed these days was what led the 1930’s crisis to a depression with deflation. Both then and now it was meant to try to keep weakening economic powers on top of the economic game. That failed and ended in the creation of the economic stabilization fund sponsored by the Roosevelt Government and designed by Harry White, later designer of the IMF. The end of the beggar thy neighbour policy meant the consolidation of the US dollar as a reserve currency at a fixed parity of 35.70 dollars to one gold ounce. There is no such item in the current discussion of the G20 meeting.

The three main issues are the framework for strong and stable growth, IFI (international financial institutions) governance and the international financial regulations. On the first issue there is a conflict between European procyclical policies and US countercyclical policies. This came out in Toronto and made for a non declaration. The issue is if highly indebted rich countries can afford to keep countercyclical policies and who will pay for them. Can the emerging nations afford to finance fiscal deficits without placing any conditions? This issue is more complicated when we consider that future economic growth as estimated by the IMF and projected to 2020 show there is a very tenuous relationship between the growth rates of the mature economies and those of the emerging economies. It is so tenuous that by 2017 the top three world economies will be China, the US and India, in that order. Great Britain left the G7 list of large economies in 2010 and was replaced by Brazil.

IFI governance is an issue where there cannot be agreement either. With the power structure changed, voting rights even adjusted as they have been recently do not reflect the shift in the world power structure. IFI design needs to go back to the drawing board in order to reconsider among other things the matter of reserve currencies, the role of baskets of currencies as reserve currencies and more importantly, the regionalisation of the international financial architecture, so it becomes more responsive to immediate problems and less subject to the whims of the US Treasury. It considers a 12% of GDP fiscal deficit good for itself but wrong for all others and blames its economic troubles on the evident strengths of others.

Last but not least the matter of financial regulation. The currency war deployed from the United States against the leading world currencies, while it has announced that it will inject a further 600 Bn USD over the next year, warns us of booms and busts in commodity and stock markets. This will have an impact on emerging country stock markets as those funds that have near 0% cost are invested around the world. It will produce a new boom in commodity prices with a new food and oil crisis as foodstuffs and oil prices soar. Worse, there will be appreciation of currencies in all countries with stock markets as short term capital flows in. The reverse will occur when US monetary policy stiffens and the money returns home, leading to sharp devaluations thus slowing down economic growth and curtailing consumption the world over. This would change the projections of the table below. This outlook makes it necessary to consider short term capital controls in the three known varieties: taxes, minimum cash requirements, and terms. The US FED has forced its trump card by announcing the injection of an additional 600bn into the markets. It is making use of the seigniorage the US dollar holds, while trying to export its crisis to the rest of the world. This must not happen for the economic sake of all. The consequence in any event is the further weakening of the reserve currency.

THE REAL G7 PROJECTED

#	2009	Bn USD	#	2010	Bn USD	#	2017	Bn USD
1	United States	14.1	1	United States	14.6	1	China	18.9
2	China	9.0	2	China	10.1	2	United States	18.8
3	Japan	4.2	3	Japan	4.3	3	India	7.0
4	India	3.6	4	India	4.0	4	Japan	5.2
5	Germany	2.8	5	Germany	2.9	5	Germany	3.6
6	Great Britain	2.1	6	Russia	2.2	6	Russia	3.1
7	Russia	2.1	7	Brazil	2.2	7	Brazil	3.0

Our estimates on the basis of IMF data.

(Seoul, 06 November 2010)

- Oscar Ugarteche is a Senior Researcher at the Instituto de Investigaciones Economicas, UNAM, Mexico and professor of international finance at the Faculty of Economics. Chairman of the Latin American Information Agency (www.alainet.org) and coordinator of the Latin American Economic Observatory, www.OBELA.org. Advisor to the Latin American debt and development network, Latindadd, Author of 15 books, the latest A critical history of the IMF, IIEC-UNAM, 2009. He has been a consultant to various UN agencies and is currently working on regional financial cooperation.

This article had the support of Leonel Carranco in Mexico City.

Beyond Bretton Woods: the transnational economy in search of new institutions, a selection of the papers for the conference with the same name held in Mexico City in 2008, coedited with Yoko Kitazawa from Pacific Asia Resource Center, Tokyo, and Paul Dembinsky, Observatoire de la Finance, Geneva, will be published in English and Spanish in 2011.

https://www.alainet.org/en/articulo/145310?language=en