The G-20 meeting in Paris seemed to yield agreement that the Europeans need to come to a vibrant resolution of the Sovereign debt issue and some plan as to how to recapitalize its problem banks. The G-20 COMMUNIQUE read like an alphabet soup of global regulatory groups (IIF, YNFCCC, MDB, IOSCO, IMF, WEB, FSB, GSIFI, SIFI, BIS … you get the idea). The Communique opens: “We welcome the adoption of the ambitious reform of the European economic governance.” This is a very brazen statement for I have not read where Europe has taken any such measures, such as fiscal unification.
The communique also noted that the G-20 nations agreed, “Those with large current account surpluses will also implement policies to shift to growth based more on domestic demand. Those with large current account deficits will implement policies to increase national savings.” Coupled with this was the vacuous words: “All countries will undertake further structural reforms to raise potential growth.” The concept of growth seemed to have been the most significant issue but when you cut through the platitudes I just cannot imagine from where the growth is going to be generated. If the SURPLUS NATIONS INCREASE DOMESTIC DEMAND WHILE THE DEFICIT NATIONS INCREASE SAVINGS IT SEEMS THAT THE EFFECT TO GLOBAL GROWTH WILL BE NEUTRAL.
The KEYNESIANS in the Obama administration cannot possibly accept this at a time when the push is for greater fiscal stimulus to generate the economic growth that FED policy has been unable to do by itself. Another area of UNCERTAIN AGREEMENT is the issue of SECRETARY GEITHNER pushing for the Europeans to use the ECB as a guarantor of European sovereign bonds. Geithner continues to pursue the Henry Paulson game plan but he fails to realize that the ECB just does not have the same legal authorities as the U.S. Treasury and FED.
Ambrose Evans-Pritchard reported that the Geithner push was rejected out of hand. Evans-Pritchard reported that Josef Ackermann, head of Deutsche Bank and the chairman of the IIF, said plans to leverage the EFSF may be illegal. “We cannot allow a rescue fund of this magnitude. The [constitutional] court wouldn’t permit, and nor would the people.” (Sunday’s London Telegraph). The main area of agreement from the G-20 is that the IMF is going to play a very large role in the financial rescue of the peripheries and most probably Spain and Italy. Christine Lagarde was pushing for increased IMF funding but Geithner and other heads of developed nations believed that the $390 BILLION IMF was a large enough war chest to deal with Europe’s problems.
It seems that Geithner believes in the IMF‘s larger role but wants to withhold further funding until the Eurocrats come up with a COMPREHENSIVE PLAN. Geithner let it be known in a Bloomberg interview on Oct. 11 that the European debt crisis is affecting U.S. growth and the “U.S. is going to do everything we can to make it more likely that they move as aggressively as they need to.” The EU is the second largest market for U.S. exports, trailing only Canada. The Obama administration is very worried that a slowing European economy will scuttle all of its economic stimulus plans, making President Obama’s reelection possibility an uphill battle.
Clarification: Readers of Notes From Underground are very aware that I have pushed for the IMF to enhance its war chest by issuing GOLD-BACKED BONDS, thus utilizing its GOLD hoard. Presently, the IMF has 90.5 million ounces of GOLD with a market value of $164.1 billion at market prices on August 31,2011. The IMF does not carry the GOLD on its books at market prices so I am confused by the $390 billion war chest to which Geithner and Lagarde refer.
More important though, under the Second Amendment of theARTICLES OF AGREEMENT IN APRIL 1978, the “IMF DOES NOT HAVE THE AUTHORITY UNDER ITS ARTICLES TO ENGAGE IN ANY OTHER GOLD TRANSACTIONS SUCH AS LOANS, LEASES, SWAPS, OR USE OF GOLD AS COLLATERAL…” (from the IMF website). Thus, my proposal is now laid to rest unless the IMF and its member nations wake up to the 21st Century and find a way to utilize all its assets. If the IMF is to become a bigger player in the developed world it needs to become much more creative in how it looks to stabilize the world in times of great systemic risk.
An Aside: THE GERMAN/FRENCH 10-year-note spread widened to a record 92 basis points on Friday, not a healthy sign for France.
On the other side of the world the Chinese 2/10 spread was a positive 32 points and the 2/10 spread in India was +33 points. These are very flat curves in the two largest BRICS, indicating that money is too tight in both those nations. Just something else to keep an eye on as so much uncertainty exists in the world.