Monday, June 11, 2018

G-20: Countering the Rise of Fritzl-nomics

[Dear readers: I apologize for this late G-20 preview. With only a few hours to go until proceedings start, I guess it's better late than never. For another take, see Reuters' list of G-20 nations' key priorities.] Britons were naturally horrified when news hit of a 'British Fritzl' lurking in the former steel stronghold of Sheffield. To avoid another media circus, authorities wisely decided to keep the identities of the parties involved under the wraps. However, do not think we're in the clear yet as there are economolesters of the highest order still at large. Like the titular antagonist, the minders of their respective currencies have locked the dollar and the pound in lightless dungeons for repeated bouts of abuse--quantitative easing, near-zero policy rates in non-deflationary situations, helicopter drops of cash, cluttering central bank balance sheets with junk assets, unstimulating stimulus packages, etc.

I have been most appalled that the two nations most responsible for messing up the world by flogging financial weapons of mass destruction to package more and more debt have been the sites of the first and second G-20 meetings. What kind of message does this send? The agendas of these two countries are rather daft: How can jillions more of debt on top of already towering piles of debt correct matters? If you were to simplify the conflict at the G-20, it comes down to the rest trying to rein in the rise of British and American Fritzl-nomics. In the past, I have branded American economic policy as Cheneynomics. Fritzl-nomics is now a required term given (a) new leadership in the US and (b) outward profession of currency stewardship while repeatedly engaging in unspeakable acts of economic sodomy. It is definitely not benign neglect; rather, it's outright molestation.

Given the number of policy issues at hand, I will draw on issue areas raised prior to the first G-20; this requires some rearranging. I will also group these issues in two: those pertaining to Fritzl-nomics and the remainder:

(1) Stimulus versus regulation - the issue of the UK and US favoring stimulus versus continental Europeans (French and Germans, Czech "highway to hell") favoring greater regulation is well-known. Sarkozy has upped the bluff quotient by saying that he will walk out of the G-20 if there is little movement on regulation. The point of difference with the Anglo-Saxons here is that they claim better national regulation will suffice such as with what Geithner has proposed. Naturally, Sarko & Co. do not buy it, preferring that a supranational body be established--remember his earlier pleas for an international "early warning system" or "college of supervisors." If not a supranational body, then at least greater cooperation among national regulators. In recent history, the US has not been friendly to bodies that threaten to mitigate national policymaking efficacy--think International Criminal Court or the Kyoto Convention. The same "not invented here" phenomenon is at work again as the US prefers multilateral institutions largely of its own design--think of the IMF before or the WTO more recently.

This issue certainly has room to become a flashpoint. Moreover, there is the more important issue of who will pay for all this Fritzl-nomics. I think even in the absence of any sort of agreement, there isn't infinite demand for UK and US debt. Brad Setser notes global reserve accumulation has slowed. Britain is already downscaling its plans following a failed 40-year gilt auction. Yu Qiao has an interesting article in the FT on how the US should create programs to channel Asian investment more productively (read: equity stakes) instead of being set up as eventual victims of a US bond bubble (I like that term). Realistically speaking, though, can you imagine the protectionist backlash which would erupt Stateside if the Chinese started buying up Yankee firms en masse? As I've said before, disciplining the US will--like the UK--involve threatening stoppage in the purchase of sovereign debt combined with a forceful statement on requiring the US to stop protectionism in buying American companies.

(2) Global imbalances - these have already been hinted at in the run-up to formal G-20 meetings, though whether it will be taken up in earnest at the meetings themselves is another thing. Said Obama at the Brown/Obama press conference:
"In some ways, the world has become accustomed to the United States being a voracious consumer market and the engine that drives a lot of economic growth worldwide," Obama said, hinting that this position may not be sustainable. "We're going to have to take into account a whole host of factors that can increase our savings rate and start dealing with our long-term fiscal position as well as our current account deficits..."

"If there's going to be renewed growth, it can't just be the United States as the engine. Everybody is going to have to pick up the pace," Obama continued. He went on to say that the world would have to shift away from the situation where other nations are "only exporting and never importing" to a "balance in how we approach these issues."
This sounds like a pretty good explanation of what's going on and what must happen. But there's more. During his first meeting with Chinese President Hu Jintao, their joint statement had this to say:
"[Obama] underscored that once recovery is firmly established, the United States will act to cut the U.S. fiscal deficit in half and bring the deficit down to a level that is sustainable"..."President Hu emphasized China's commitment to strengthen and improve macroeconomic control and expand domestic demand, particularly consumer demand, to ensure sustainable growth and ensure steady and relatively fast economic development."
Once more, I see lip service but little action on both sides. Recall that the CBO is forecasting $9.3 trillion in US deficits over the next ten years. Does this mean the US will be mired in a decade-long recession? Meanwhile, consumer credit in China is still largely non-existent. As I like to point out, these two countries occupy extreme ends of the spectrum when it comes to household savings--the US ought to save much more and China much less. Ideally, we'd have earnest discussion on how other countries will pick up the demand slack while the US plots a real way out of stimulus mania that tends to exacerbate such imbalances. But, as far as I can see, this is not a main agenda topic despite resolving it being key to fixing of our shared woes.

(3) More oversight of credit rating agencies/hedge funds/tax havens - along with better international financial regulation, these are said to be non-negotiable by Sarkozy, all the while invoking German assent. It's here where I expect more movement. While the Fritzl-nomic duo still prefers a freer hand in doling out rules and sanctions as most credit rating agencies, hedge funds, and tax havens have activities drawing on UK and US business, the pushback against their excesses is real. Moreover, both countries are busy finding ways of clawing back revenues lost to tax havens. As the WSJ notes, drawing up of plans to combat tax havens is well underway:
Officials involved in preparations for Thursday's G-20 summit say the leaders will agree on guidelines for tax havens and outline sanctions for those that don't sign on. But negotiations over whether to take the added step of publishing a blacklist of uncooperative tax havens -- a measure that European governments have been pushing hard -- were continuing.

The accord has advanced further than many governments believed likely a few months ago, reflecting the hardening attitude of many European governments toward tax havens, which they fear are siphoning off much-needed revenue amid the recession.

The prospect of being on a G-20 blacklist backed by sanctions has already prompted Switzerland and at least nine other tax havens to promise to relax bank-secrecy laws and cooperate with foreign governments trying to chase down tax evaders.
(4) Trade, WTO Doha Development Agenda - expect a word to be said in the communique about countering the rise of protectionism and completing Doha. In reality, heightened global interdependence has prevented an outbreak of severely damaging protectionism. Sure there are quarrels here and there you read about in the IPE Zone, but nothing threatening the collapse of the entire edifice. Still, do not expect a strong push to get parties back to the negotiating table soon. New EU Trade Commissioner Catherine Ashton calls for increased trade finance during a credit crisis, and I certainly think this may help. There is talk of smoothing US-India relations that sunk the most recent attempt at a Doha deal.

(5) Better LDC representation in multilateral bodies like the IMF - this is an interesting one given recent Chinese moves proposing for an alternative reserve currency and signing of bilateral swaps with other LDCs. Our favorite official news agency Xinhua is even trumpeting a shifting balance of power. Many have said these moves may be precursors to China asking for a greater voice in the IMF in exchange for providing the institution with more emergency funding (and hence a larger SDR allocation). If China is dissuaded from increasing its voice at such bodies by being given unattractive terms of engagement, don't be surprised if it continues to make friends and influence countries via bilateral arrangements.

Once more America and China are mirror images of each other: the US is financially weak while China is financially strong, though the US has much influence at multilateral institutions (many of which it designed) while China's influence at such institutions is negligible. It makes for an interesting interplay.

* * *
There are several important issue areas I've mentioned before that do not seem to be on the agenda: global governance of migration, more comprehensive measures of well-being than those of opulence, proper economic valuation of environmental considerations, and movement away from a share price focus. (See my earlier preview for the last G-20 on why I consider these key areas for international cooperation.) Nevertheless, I was chuffed when Jack Welch himself--often credited for starting the idea of "shareholder value"--had this to say:
Jack Welch, who is regarded as the father of the “shareholder value” movement that has dominated the corporate world for more than 20 years, has said it was “a dumb idea” for executives to focus so heavily on quarterly profits and share price gains. The former General Electric chief told the Financial Times the emphasis that executives and investors had put on shareholder value, which began gaining popularity after a speech he made in 1981, was misplaced.

Mr Welch, whose record at GE encouraged other executives to replicate its consistent returns, said that managers and investors should not set share price increases as their overarching goal. He added that short-term profits should be allied with an increase in the long-term value of a company.

“On the face of it, shareholder value is the dumbest idea in the world,” he said. “Shareholder value is a result, not a strategy . . . Your main constituencies are your employees, your customers and your products...”
In essence, many of the things gone wrong in this world are products of short-term thinking: unsustainable consumption, stimulus Fritzl-nomics, heavy discounting of environmental concerns, growth-ism, share price focus, etc. What separates a statesman from a mere politician is the ability to put aside temporarily advantageous negotiating positions for the long-term global common good. Are there any real statesmen among the G-20 leaders? I certainly hope so.

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