November 12th, 2010
12:25 PM GMT
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The good news is that the G20 represents 85 percent of global output.  The bad news is that it is functioning more like the G2 with the current superpower (the U.S.) and the future superpower (China) dominating the agenda.

U.S. President Barack Obama is facing intense political heat at home and as a result was forced to go to Seoul wanting to tick a number of boxes linked to a domestic agenda:  a lower currency to help boost U.S. exports and therefore jobs and to lower the trade and current account surpluses of China, Japan and Germany.

Those three countries are export-led economies, which in reality is what they rely on for growth.  Yes more should be done to spur domestic demand - especially in Japan which remains stuck in stagflation cycle. 

But this depends more on confidence and culture.  Consumers in all three of these countries are high savers and less risk adverse than Americans.  So this has less to do with monetary policy than it appeared in Seoul around the bargaining table.

Bu the revaluing of the dollar, despite denials from the U.S. Treasury, is a slippery slope.  Once one starts down that path, it is certainly difficult to apply the brakes.  There are both economic and political considerations at play here.  China, Japan and the countries of the Gulf Cooperation Council are, let’s say,  sizable customers of U.S. Treasury bonds.  As the dollar slides, so too does the value of their holdings.

China has started to rebalance its portfolio of foreign assets, with nearly a third in Euro-based holdings.  But this too is a delicate balancing act.  The big exporters don’t want to see their number one customer of imported goods to have a prolonged bout of economic malaise.

In the Middle East, the Gulf States represent a fully-fledged dollar zone.  Five of six GCC members are still pegged to the dollar.  As one official in the region told me, the dollar ship is taking on too much water and there is a danger that it will pull those that are hitched to the currency down for the ride.  This could easily re-introduce the regional inflationary threat that was prevalent in the pre-crisis, boom economy.

While short-term equity investors welcomed the latest round of spending by the U.S. Federal Reserve - to the tune of $600 billion dollars - long-term strategists continue to climb a wall of worry.  They ask the obvious questions about the potential for future inflation and the massive pile of debt which continues to mount.  Before his arrival to Seoul, President Obama was given the initial findings by an independent budget commission suggesting severe cuts in domestic spending.  The political tightrope after a mid-term election washout is getting more difficult to balance.

There is a much bigger global reality at hand.  For the past two decades, the discussion was focussed on how to best boost the economies of the developing world and most importantly the per-capita income levels of their citizens.  That time has come and it is being reinforced by billions of dollars of hot capital looking for better returns than investors can find within the “old G8.”

This is a historic global re-balancing of both economies and political power and the transition is not an easy one.  The giant surplus countries from the Middle East (thanks to oil exports) and Asia (thanks to consumer exports) are sitting not only on wealth but more clout than ever before.  They recognise the need to accelerate domestic development.  No one can argue that China and for that matter G20 members like Saudi Arabia are not spending ample sums to do so.   It is just not happening at the pace to appease the U.S. President and Congress, which are trying to respond to a restive middle class that is faced with record unemployment.

Two decades ago, there was a convergence of factors - the fall of communism, the lowering of trade barriers in a WTO context and the wide-scale introduction of the internet - which accelerated the pace of change and competition.  Take away all the political posturing and that is really what is at play here within the G20.  In fact, one could argue that is why the G20 was patched together so quickly after the 2008 crisis, and why it is so important for the collective voice of the group not to be overwhelmed by issues of the G2.



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soundoff (26 Responses)
  1. Ricardo

    Sarkozy is such a dope.

    November 12, 2010 at 2:09 pm |
  2. Tom

    Brazil will come up with the best ideas to solve the problems, as usual...

    November 12, 2010 at 3:08 pm |
  3. Tom

    Moderator? Late for work?

    November 12, 2010 at 3:17 pm |
  4. Isitbad

    sarkozy always have something else to look at.

    November 12, 2010 at 3:17 pm |
  5. margaret Diamond

    To whom It May Concern:

    My comment is the three markets. Japan Germany and the middle East play an important part of the financial markets. Trade import and export are important. The gas and oil companies will play an important roll in recovery especially now that the weather is geting colder and people need oil and gas. Small business in the united states play an important roll in income to the markets Also my opinion is also the united kingdom plays an important roll in commerce and market buying especially now. Electronic companies, manufacturing cars from toyota and trade.

    November 12, 2010 at 3:21 pm |
  6. Martin Luther Akujobi

    American economy was destroyed by the funding of Irag and Afgan wars. EMPIRES THAT ENGAGE ON SENSELESS WARS ALWAYS COLLAPSE FINANCIALLY AND ECONOMICALLY. And America has completetly become a collapse empire. Is like american politicians failed to read history of empires and their consequent collapse. Example Roman Empire and then british empire.

    November 12, 2010 at 3:27 pm |
  7. Peter Azunna

    It is very bad that none of the Africa countries is on the G20. This means that, They have to put up a strong economic plans to be able to be one of the G20 in the nearest future

    November 12, 2010 at 5:25 pm |
  8. Shen Thomas

    South Africa on the game

    November 13, 2010 at 1:41 am |
  9. Per Holmlund

    Time for US to cool down?

    And not only US but also Europe. How does the figures look like if we compare EC, USA and BRIC at a per capita level?

    I said it before the last run down and will continue to repeat it: When will growth become the price for growth itself? Who thinks that the world with a 3 to 5 annual growth will reach a stage where BRIC countries get say two thirds of the west's per capita level?

    With a fragmented world where local polinomics – political economics – is key in running election cycle economics most leaders seems to answer yes. Today politicians are obsessed by a financial bubble that happened some years ago when focus should on the polinomic bubble.

    We are living in a period with a polinomic bubble that has finished two phases, a stock market crisis and a private leverage crisis, and that has at least one phase left and that is the federal leverage crisis.

    And why? Because politicians are running the economy as my aunt was driving the car. “My aunt looked in the rare mirror when driving. First with one eye and then with two – pang and bang – and now she is ten yards under.”

    And when the bust is a fact the blame game starts. It was the guy behind me. You now the Wall street guy. No brain, no pain.

    Börsens Tio Budord (Ten Commandments of the Stock Market) 2003, Holmlund
    "… and now we are standing ahead of the 20 hundreds when handling of crisis can become the fashion.
    …a development that can lead to a recession because a down turn can become global when it hits. We’ll get a test when this economic upturn, that we now (2003) expect to come, after some years turns down."

    November 13, 2010 at 8:49 am |
  10. jamal

    The future is bright

    November 13, 2010 at 8:17 pm |
  11. Andrew van Dam

    The tide turns...

    November 14, 2010 at 2:23 pm |
  12. fox

    China will never became a superpower unless its change political system

    November 15, 2010 at 3:31 am |
  13. christopher chi-roland

    thank you very much Dr Hilary Clinton.
    what about Ahiajoku foods.or Annoöalaenyi.God bless you.

    November 15, 2010 at 9:16 am |
  14. Pro-active

    Well, I don't see the Germans, Japanese and Chinese changing their buying and spending habits from a saving culture to one of spending spree just because the US says so and it would help the world. Their consumers have adopted a savings culture which is the right attitude, culture and behaviour and it's for other economies and their consumers to do the same and cultivate a saving habit & culture.

    November 15, 2010 at 2:51 pm |
  15. GEORGE ARGIRIOU

    THE G20 IN TIME WILL PRINT MONEY OUT OF NOTHING AND ADMINISTRAIT IT 2 THE WORLD WISELY.THERE WILL B NO1 THAT WILL B AGAINST THAT.NOT CHINA NOT GERMANY NOT JAPAN.EVERY1 WILL AGREE.

    November 16, 2010 at 12:48 pm |
  16. GEORGE ARGIRIOU

    THIS IS JUST MY THEORY.I COULD B WRONG.

    November 16, 2010 at 12:59 pm |
  17. GEORGE ARGIRIOU

    MANY PEOPLE IN THE GLOBE WISH THAT THAT COULD B TRUE.

    November 16, 2010 at 1:02 pm |
  18. max

    @fox
    correction, china will never be a superpower if US can start a proxy civil/ or any other war in that region, maybe with the afghans/pakistan as they fought russia in the 80's....and then US will end up broke as well...

    November 16, 2010 at 3:24 pm |
  19. GEORGE ARGIRIOU

    THERE MUST B SOME ORGANISATION THAT WILL CARE 4 ALL OF THE WORLD AND NOT EVERY1 FOR HIMSELF.THIS IS WHAT THE TIMES R CALLING 4.THE SYSTEM WILL REMAIN THE SAME AND THE RICH WILL B RICHER AND THE POOR WILL B LIVING WELL.

    November 16, 2010 at 5:22 pm |
  20. GEORGE ARGIRIOU

    THIS IS PROTECTED CAPITALISM AS I CAN IMAGINE.WHEN ECONOMY IS LOW IT WILL GIVE MONEY(FROM NOTHING) AND WHEN THE ECONOMY IS HIGH IT WILL DO NOTHING.

    November 16, 2010 at 5:26 pm |
  21. GEORGE ARGIRIOU

    AT LIST I TALK ABOUT IT.THE WORST THING IS WHEN U DO NOTHING.

    November 16, 2010 at 5:27 pm |
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