G-20, Divided We Fall

President Obama said, "Instead of hittin home runs, sometimes we're gonna hit singles. But they're really important singles." This was the positive spin that unwound the two-day summit of the Group of 20 Nations (G-20). However, the end result of the Seoul meeting was neither the consummation of an expected trade deal with the South Koreans nor a resolution on the trade imbalance with China. The latter issue weighs heavily on the agenda of the US Administration.

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G-20, Divided We Fall

As quickly as the US could get started complaining, China redirected attention to the US Federal Reserve's recently announced capital markets actions, labeled QE2 by Wall Street. Characterizing China's argument can be simplified to its pointing the finger of blame back at its accuser. While promoted as a strategy to spur economic advance, the Fed's quantitative easing will also serve to devalue the dollar and drive US export demand. If this is not trade war, I do not know what is. And in its quarrel, China has found a strange ally, Germany, which is also struck down by American currency devaluation.

President Obama's singles hitting reference addressed progress in global financial regulation and efficiencies in aid provision to poor nations. More importantly, he may also be conveying his approval for a plan for the G-20, through the IMF, to analyze the effects of trade imbalance on the global economy and local economies. Clearly, the US would benefit from a global acknowledgement, based in economic fact, that China is cheating. By unfairly, and against free market pressure, keeping its currency cheap, China reaps great economic benefits at the expense of other trading partners and competitors.

The argument has grown heated recently, thanks to rising voices back west, including the qualms of Treasury Secretary Geithner, the Democrats in Congress, and the President himself. In the past, a Republican led American government had been cautious about treading on the feet of the dragon, but a new brazen knight has taken over the kingdom by way of valor. Obama is now faced with the challenge of his presidential political career, restoring economic confidence before 2012. Thus, he wields the once forbidden blade for the sake of fairness and the restoration of his kingdom.

The Chinese Yuan has appreciated a bit since the US government began insinuating it would play currency hardball, and certainly following the declaration of QE2 by the independent Fed. Many hopeful global leaders applauded the use of the G-20 forum to work through issues like these, but the fact is that the US and China appear already engaged in a sort of bilateral currency warfare, however cold it may still be. My concern is that given some time to dwell on the US action, and to debate and deliberate it, the EU and emerging nations like India will likely counter US and Chinese maneuvers with actions of their own before any civilized study is concluded. Thus, the race to the bottom will begin. The result: Fiat currency value would dissipate globally, and the gold standard would be re-established.

While the cost of a loaf of bread is already equal to a year's salary in some very poor nations, the inflation that could ensue as currency manipulation is complemented by rising demand for scarce resources in an increasingly globally developing world is terrifying to me. Global cooperation could quickly deteriorate in such an environment, given likely civil unrest and political pressures. Unstable leadership could easily give way then to radical reform, and usher in popular nationalists. Such individuals could be politically wise, but otherwise ignorant or even dangerously selfish. The same mechanisms that allowed Hitler to rise to power would be in place once again, and the angry crowds would cheer for it all.

Instability would replace global organization, and chaos could follow. In such an environment, world war reenters the equation, and given the unfolding situation in Iran, and the importance of its oil reserves to China, a match sits ominously waiting to light the fire.



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