The G-20 In Seoul

The celebrated meeting last week of the G-20 leaders in Seoul failed in its objective to achieve substantive agreements about how to begin to gradually and neatly reduce the enormous and threatening international financial imbalances.

President Barack Obama insisted on condemning the inflexibility of China by rejecting the free circulation of their money, indicating that it was quite inflated without accepting responsibility for his country’s own monetary policy, which insists on pumping the financial markets with dollars and thereby causing the dollar’s devaluation.

The final communiqué of the G-20 was representative of the same play on words that those in charge utilized in their own presentations. They spent the night drafting this camel defined as a horse planned by a committee, in order to describe the extremely poor agreements that they had reached in the aforementioned meeting:

“These indicative guidelines composed of a range of indicators would serve as a mechanism to facilitate timely identification of large imbalances that require preventive and corrective actions to be taken.”

The battery of indicators is still being defined and will be produced without rushing, in order to be ready by next year. These indicators substitute the U.S. proposal adopting quantitative goals, like an internal deficit of four percent of GDP, which would automatically imply the need for political actions to correct them.

The Korean organizers of the meeting were considered to be very useful initially in avoiding what eventually transpired — reproaches among the participants. The U.S. was at the point of succeeding but they saw their proposal collapsing, so the G-20 adopted the Seoul Consensus to replace the highly criticized and barely understood Washington Consensus.

Germany drove the opposition against the U.S. proposal. This proposal is in stark contrast to Germany’s insistence that members of the European Union adopt the very specific numeric criteria as defined in Maastricht in 1991. These numeric criteria served to create a common currency in Europe, and this step by Germany points to European evolution toward political integration.

In this instance, Germany tried to recreate — in the European context — conditions of physical and monetary stability similar to the very strict conditions [Germany] had imposed upon itself in order to never again repeat the terrible experience of the hyperinflation that it suffered between World War I and World War II.

Now, nevertheless, the plan proposed by the U.S. tried to impose more or less immediate quantitative limits to large surplus externally generated by China and Germany while it offered to demolish its own commercial deficit gradually (that is to say, who knows when), since its immediate priority is the economic recovery.

Neither the surplus countries nor the rest of the G-20 bought the American version of how China manipulates its currency’s exchange rate while claiming they don’t do it themselves, in spite of the report of the Fed flooding the financial markets with greater fluidity. The U.S. claims that this is in order to pursue recovery, growth and employment generation, and not the devaluation of the dollar, which is in fact the immediate consequence of the Fed’s actions.

In fact, one of the principal concerns about the militant monetary policies of the Fed is announcing the purchase of national debt tools for the U.S. in the months to come. This will fund dollar for dollar the budgetary deficit that the government will incur in that span of time.

This means that the autonomy that must exist between physical and monetary policies, a cardinal rule for the stability of currency, is flagrantly being violated by the U.S. Central Bank, which erodes the dollar’s credibility and puts in question the permanence of the dollar as a currency of an internationally accepted reserve.

The devaluation suffered by the dollar, which has occurred ever since the Fed announced its policy of quantitative easing, immediately translated itself into upward pressures [in the stock market] on the prices of raw materials — a tendency that is clearly contradictory with the supposed threat of deflation that some members of the Fed foresee on the horizon.

Now, we will see what the future has in store for us as the world financial situation becomes more and more unstable due to the inaction with regards to the foremost causes of the imbalances. It now falls on the grandiloquent French, who are leading the G-20 with hyperactive Nicolas Sarkozy at the forefront, to succeed in finding the necessary solutions.