This week brings the Moscow circus to the world stage. The world’s major economies meet in Moscow as the Russians are presently in the leadership position of the G-20’s rotating presidency. It used to be the G-7 nations that crafted an economic blueprint for the World Bank and IMF to somewhat adhere, but as much of the global economic growth is now in the BRICS and the other emerging economies, the world’s former colonial powers have had to make room for the rising economic nations. Most of the time the G-7 and G-20 meetings have been photo-ops for world leaders, but every once in a great while something constructive actually makes its way into global policy. The immediate global consensus after the Lehman debacle helped stem the global credit markets from total collapse. This G-20 meeting will not be one of the constructive outcomes as the G-20 members are nowhere near any type of consensus.
Going into the end-of-week conference, the Europeans cannot even reach any type of agreement. The most important item to be discussed is the “Currency Wars,” or, the perceived battle to devalue the way to prosperity. The Japanese have set currency devaluation as the main topic for discussion for their success in depreciating the YEN from the conclusion of the last G-20 meeting in October. From Asia to Latin America, the world’s top nations are concerned that Japan’s efforts are causing disruption to global trade and finance. The French are complaining that Japan is causing an undeserved rise in the Euro and the U.K. and U.S. are making the situation worse by the continued policies of Quantitative Easing–currency intervention by stealth.
Today, the French and Germans were revealing vast differences of opinion from within the EU. The French maintain the euro is too strong while the Bundesbank President Jens Weidmann maintains the Euro “does not signal a serious overvaluation.” Weidmann also cautioned other countries not to move away from inflation targeting and only concentrate on stimulating the demand side of the equation. The U.S. used its Treasury Undersecretary for International Affairs, Lael Brainard, to caution that “the G-20 needs to deliver on the commitment to move to market-determined exchange rates and refrain from competitive devaluation.”
Secretary Brainard: Is the FED‘s continued purchasing of Treasury and mortgage debt in an effort to stimulate demand through ultra-low interest rates considered intervention for the purpose of competitive devaluation? One nation’s constructive efforts to sustain domestic demand may be economically destructive for the global economy. Ms. Brainard then goes on to point the finger at China and reiterates the old refrain: “China needs to further boost household demand and reinvigorate the move to a market-determined exchange rate and interest rates.” She then admonishes Europe, saying that it must come together “around a joint strategy for growth.” Yes, this is going to be one contentious G-20 meeting so I caution to be leery of misleading headlines.
Making the situation even more chaotic is the piece in tomorrow’s Financial Times by the previous head of the Swiss National Bank, Philipp Hildebrand. As the previous president of the SNB, Mr. Hildebrand instituted the 1.20 EUR/CHF floor, which helped paved the way for the recent aggressive monetary action by the Bank of Japan (whose success has given rise to much of the acrimony heading into the G-20 meeting in Moscow). Hildebrand asserts in the FT piece, “No Such Thing As A Global Currency War,” that the world’s central banks are acting within their mandates. “The monetary policy battles that have been fought and continue to be fought in so many economies are domestic ones. They are fights against weak demand, high unemployment and deflationary pressures. A greater danger to the world economy would in fact arise if central banks did not engage in these internal battles.”
Hildebrand defends all current policies and basically tells all the concerned parties complaining about “currency wars” to mind their economies and go about their own policies. This G-20 communique is going to be in need of careful reading to make sense of diplomatic nuance. Hildebrand has fired a shot, waiting for response from the Chinese, Russians and Brazilians.