Beginning tomorrow, the world will turn its attention to Seoul, where finance ministers, central bank governors, and heads of state are convening to address the planet’s economic ills. Oxfam International, a charitable organization, wants the G-20 to impose taxes on financial institutions so it can use the proceeds to tackle issues such as global poverty and climate change. U.S. Secretary of State Hillary Clinton is urging the G-20 to find ways to give women more control over their economic destinies.
It’s a good bet that these kinds of issues will be nothing but a sideshow. The smart money says international trade and currency devaluation will take center stage at this week’s summit, even though it’s unlikely that any important issues will be resolved.
Even before the participants began packing their bags for their sojourn in Korea, the U.S. was put on the defensive. The uproar began immediately after the Federal Reserve announced its most recent plan to stimulate the economy with a process known as quantitative easing, which is designed to effectively lower interest rates for businesses and consumers. In particular, the Fed plans to expand its balance sheet by purchasing $600 billion worth of Treasury bonds on the open market. The idea is to increase the demand for these fixed-income securities, thereby driving up their prices and pushing down their yields. The Fed apparently believes that interest rates — already near zero on the shortest-term debt — are still too high. By implementing this plan, the Fed is betting that lower interest rates will help revive the economy.
That’s not how other stakeholders view the Fed’s move. After all, the Fed has been through this process before. QE1 drove rates significantly lower, but failed to stimulate the economy enough to generate jobs. With interest rates already at historically low levels there is no assurance that QE2 will produce any better outcome.
In the view of many G-20 members, Federal Reserve Chairman Ben Bernanke is acting irresponsibly, living up to his old nickname, Helicopter Ben, a reference to a comment he once made about throwing money out of a helicopter to help fight deflation. China, Germany, Russia, Brazil, and Japan argue that the real aim behind America’s actions is to drive down the value of the dollar. They believe the U.S.—whether intentionally or not—is initiating a currency war.
President Obama, who arrived in Seoul today, vigorously defended the Fed’s actions, arguing that global economies would benefit from its efforts to stimulate the U.S. economy. His reasoning is that more jobs in America will result in more demand for all goods—including those from abroad.
Yet there is no denying that the most obvious result so far of U.S. economic policy is more debt, a larger budget deficit, and a weaker dollar, the value of which continues to plummet, especially against commodities such as gold. Many G-20 members fear that America is so desperate, it will do almost anything, including debasing its own currency, in order to improve employment and narrow its trade deficit. These countries seriously doubt that the Fed’s actions will strengthen demand for foreign goods. They know all too well that a weaker dollar makes U.S. exports cheaper. They also believe that any increase in U.S. exports will have only a marginally beneficial impact on employment. It likely won’t create enough jobs to drive up consumer demand for foreign products. In their view, America’s policies simply put their own economies at even greater risk.
Somewhat unexpectedly, but with impeccable timing, in a Financial Times op-ed, Robert Zoellick, president of the World Bank, called for “a co-operative monetary system … employing gold as an international reference point of market expectations.” When asked to comment on Zoellick’s call for a gold standard, Steve Forbes said it was a milestone. A long-time advocate for a stable-dollar policy, Forbes said Zoellick’s comment will have “a profoundly positive impact on the global economy.”
This weekend, the G-20 might give lip service to Oxfam’s efforts to eradicate poverty, and Mrs. Clinton’s call for empowering women. They might even agree on some kind of warning system to alert us when a country’s trade balance gets out of line, as if we couldn’t figure that out anyway. But they are not likely to reach consensus on meat-and-bone issues such as trade deficits and exchange rates that have a real beneficial impact on global economies. They will not agree on setting limits on trade balances, as Treasury Secretary Timothy Geithner wants, and there is no way they will reach a consensus about a gold standard. That may make no difference to global investors anyway. After all, as Zoellick also pointed out, “markets are [already] using gold as an alternative monetary asset today.”