SEOUL - The United States and China are on a collision course as this week's
gathering of leaders of the 20 most important economic powers threatens to
devolve into a meaningless charade amid pressure against a US scheme to cure
financial ills by printing ever-more money.
From China to Germany, Brazil to France, the world's financial wizards are up
in arms about the decision of the US Federal Reserve to buy up US$600 billion
in Treasury bonds in a move that may make the US the "odd country" out in the
Group of 20 (G-20), when they meet in Seoul on Thursday and Friday.
The term for this move is quantitative easing (QE), and the latest
round, on top of the earlier purchase of US$1.7 trillion, is dubbed QE2, but it
won't be anything like a cruise on the old QEII, the luxury liner Queen
Elizabeth II of a bygone era.
"One of the biggest concerns with this round of quantitative easing is that it
will make the already weak US dollar even weaker," said the Bedford Report in
an analysis of the market impact.
Lawrence Summers, US President Barack Obama's top economic adviser, danced
around the issue on Tuesday in a teleconference with the Asia Society's Korea
Center in which he said, enigmatically, "You are going to see continuing
discussion at the G-20," but he acknowledged "the imbalances will not be
Nor was he at all optimistic about the G-20 reaching some semblance of
consensus that might paper over the fissures, more like chasms, of
disagreement. All he would say, in the most polite circumlocution, was, "I am
confident we will reach a successful outcome at the summit."
Fed chairman Ben Bernanke is doing some fancy talking of his own to allay
concerns, saying that buying up all those bonds, which calls for spewing out
tonnes of plain old $100 bills, is "just monetary policy" by another means.
What else can you do, he pleads, with the high number of people out of work in
the US , the rate of inflation below expectations and no more room for slashing
short-term interest rates. The phenomenon of "a large amount of slack and
declining inflation", he said, was "a signal that more should be done" and "the
motivation" for the move.
As far as most of the leaders converging in Seoul for the G-20 are concerned,
however, Bernanke is playing an old-fashioned game of voodoo economics, and
they see the Fed's sudden move as carefully timed to undercut arguments for
other G-20 nations not to act decisively in revaluing their own inflated
The Fed's grandstand play, they predict, will either backfire or have little
impact in redressing what all acknowledge are gross "imbalances" in a system in
which China and Germany are reaping fortunes in trade surpluses while the US
and others have huge deficits.
The US gambit, if nothing else, provides more ammunition for all sides in what
Brazil's Finance Minister Guido Mantega was the first to call "currency wars"
for the pushing-and-pulling over currency revaluation.
Until the Fed's move last week, Mantega was the most outspoken among the
ministers of the BRICs - Brazil, Russia, India and China - a loose assortment
of countries that investors and economists like to describe as "new emerging
markets" covering large geographical areas, large populations and growing
He did not hesitate to blame the US for adding to global economic distress by
printing ever-more money while failing to bring its trillion-dollar budget
deficit under control. "For me, most destabilizing for the global exchange is
the devaluation of the dollar," he has said,
Since the Fed's latest move, leaders and their financial gurus from a host of
countries are joining the chorus, loudly publicizing views that they had been
reluctant to express so openly for fear of upsetting the G-20.
Who would have imagined, for instance, that German Finance Minister Wolfgang
Schauble would have denounced US fiscal policy as "clueless" or that his South
African counterpart Pravin Gordhan would have stated so frankly that the impact
was to "undermine the spirit of multilateral cooperation that G-20 leaders have
fought so hard to maintain during the current crisis".
The Chinese, the US public enemy number one on currency issues due to its to
refusal to cooperate on drastically revaluing the yuan, were not quite so
outspoken, but if anything more forbidding in their staunch defense of their
own policies. Why, asked Vice Foreign Minister Cui Tiankai, does the US hold
China responsible for its own failure to hold down its budget, and why does the
US persist in demanding that China increase the value of the yuan while
simultaneously devaluing the dollar?
With all the annoyance over US monetary policy, one has to wonder what Obama is
going to tell China's President Hu Jintao when they meet at the opening session
on Thursday in the vast Convention and Exhibition Center and then dine that
evening at the National Museum. The concern is not that they'll shout at one
another, or even display overt coolness. Rather, they're likely to talk in the
same bland generalities with which the G-20 finance ministers and central bank
governors covered their differences last month in the ancient Silla kingdom
capital of Gyeongju, in southeast Korea.
Obama is absolutely sure to say, in effect, look guys, the whole world is going
to have a much healthier economy if the US economy improves. And to do that,
he'll say, we need to cut down our trillion-dollar trade deficit and you guys
gotta set your currencies at their real values and stop dumping all that
low-priced stuff on us.
And Hu and all the others are going to nod politely while going off on their
own double talk about their sincere desire to reduce imbalances and, while
they're at it, elevate all those poor nations that the G-20 is making a major
conference topic under the rubric, "development".
Trouble is, the Fed's move is going to seem to some of those leaders, including
Hu, as almost a betrayal of Gyeongju, where US Treasury Secretary Timothy
Geithner got off to a bad start by trying to talk the other G-20 ministers into
confining their surpluses to 4% of their current account surpluses.
China and the rest shot down that idea so fast at Gyeongju that Geithner was
left sputtering he didn't quite mean that, just that everyone should be good.
The final statement papered over everything with ritualistic cant about the
evils of protectionism, the need for price stability and, if nothing else,
progress toward "exchange rate systems that reflect underlying economic
fundamentals and refrain from competitive devaluation of currencies".
That kind of mumbo-jumbo would appear ideally suited as a model for the "action
statement" that should emerge from the G-20 on Friday. Geithner himself, after
the gathering of Pacific-rim finance ministers at the Asia-Pacific Economic
Cooperation group confab in Kyoto, was talking up that old catchall,
Targets, said Geithner, were "not something you can reduce easily to a single
number". Indeed, lest any of them hark back to Gyeongju, he added for good
measure that targets were "not desirable, necessary and it's not likely at this
stage", he said. Nor did he see "re-emergence of the type of excess imbalances
on the trade side, either surpluses or deficits that could threaten future
But what if the meetings surrounding the summit get heated, what if the
"sherpas", the special word for the senior finance people from each country who
are spending much of the week frantically trying to iron out differences, are
so taken aback by the latest US solution to its problems that they really get
stuck on coming up with a fresh formula?
With G-20 countries at severe odds on the dominant issue of US-led demands,
South Korea basks in the spotlight of center stage. Jang Ha-sung, dean of the
business school at Korea University, sees "China, India and Korea together as
the largest portion of the emerging market countries".
When it comes to the issues that never go away, those of imbalances in
currency, trade and income, Jang makes an extraordinary prediction that may not
sit well with Geithner's incessant demands for the revaluation of China's
"My sense is the Chinese yuan will be one of the world's top currencies," he
says. "The Chinese yuan will be stronger than the Japanese yen or even the euro
or the dollar, and the Chinese will play a key role in global recovery."