The annual meeting of the IMF (International Monetary Fund) ended with the U.S. accusing China of keeping the yuan artificially low and with China accusing the U.S. of flood merging markets with hot money by keeping its interest rates near 0%.
I think Brazil got it just about right when it said, “A pox on both your houses!”
All of this bodes ill for the meeting of the G20, the club of the world’s largest economies, that ends with a leaders’ summit in Seoul on November 11-12.
I’d be surprised if the G20 meetings managed much more than a face-saving statement of unity.
Yesterday, October 13, Japan ratcheted up the tension by calling on China and South Korea to let their currencies appreciate.
Nice way to treat your hosts even before you arrive.
Anyway, back to the IMF’s meeting in Washington last week: Talk about disagreements about the basics of the global economy.
The U.S. stubbornly stuck to its position. Not that the U.S. doesn’t have a point. The dollar was down 11% versus the yen since mid-June but only a bit more than 2% versus the Chinese yuan.
China’s June pledge to let the yuan move in a wider range seems pretty empty against that backdrop.
China wasn’t exactly a model of accommodation either. But China too has a point. With U.S. interest rates effectively at 0%–which puts the real return (once you subtract inflation) into negative territory–traders and investors looking for a higher return are flooding the financial markets of Brazil, Poland, Thailand, India, and China with cash. That drives up the price of local currencies (making exports more expensive) and raises local inflation. And it makes financial authorities in these countries very, very nervous. On past experience they know that this hot money can flow out as fast as it flowed in.
With the two biggest global economies at loggerheads, countries like Brazil have little choice but to throw up their hands and say, as Henrique Meirelles, the head of the country’s central bank did, “Brazil won’t pay the price for several countries’ imbalances. Brazil will protect its economy regardless.”
Real action? Politically impossible in the United States (Even talk about striking a bargain with China at election time?), and psychologically and historically impossible in China. (Strike a bargain with the United States in the weeks after the Nobel peace prize goes to an imprisoned Chinese dissident?)
So investors can expect financial business as usual after the G20: a declining U.S. dollar; a virtually steady yuan; more currency interventions in the market for yen, real, won, and baht; and rising global tensions over trade and currencies.
The second quantitative easing program that a rising stock market is counting on the Federal Reserve to deliver will make those tensions worse. Nonetheless, I fully expect the Fed to go ahead.
The alternative of doing nothing and risk having the economy potentially slip back into recession is just not palatable to the Bernanke Fed.