The G20 Blame Game

As the world puts Syria under the microscope you might need a little change of topic to keep from going mad. So I decided to write about my gall bladder. People my age spend at least 74% of their time talking about their physical ailments and while I feel pretty good today I could share a lot of medical information with you. But as I was researching shingles and Dupuytren’s contracture I ran across an article about the G20.

Apparently the G20 is meeting in Russia and there were many photos of Mr. Obama and Mr. Putin playing darts with hand grenades. Since most of you think the G20 is the latest sports car made by Pontiac I thought it might be helpful to explain what was going in Russia with the G20 and why we should care.

The letter G in this context refers to the word Group and the word Group applies to countries that want to discuss politics and international relations. G2 is used when the US and China get together to chat about common issues. More popular is the G7 which includes the largest and most wealthy countries in the world when they do not want to include China in their meetings. This includes such stalwarts as the US, UK, Canada, France, Germany, Italy, and Japan.  The Canadians usually bring the beer. Eh. 

Anyway, the G7 has been meeting to solve global problems since 1975 and most people would agree that this group of overweight and sex addicted world leaders have solved almost no problems except for increasing Canadian beer exports. But they do meet regularly and have spectacular meals and the meetings are always followed by much back-slapping and a published summary of meeting accomplishments and common goals. For example hardly a meeting goes by when the G7 does not underscore their sincere interests in global harmony and world peace.

At one meeting it was pointed out by one G7 member that there are other countries that have gone beyond national potty training and ought to be included as formal members of the group. Since the name of the group was G7, they were met with an immediate mathematical challenge of how they could have more than 7 members and still be called the G7. I think it was France who suggested that they add Russia to the group and call it the G8. Problem solved!

As you can imagine, once Russia was added, the other members of BRIC – Brazil, India, and China -- felt lonely, rejected, and insulted and demanded that they be added to the G7 as well. Of course, this caused a stampede of other countries like South Africa, South Korea, and South Carolina who demanded they be included. So far we now have 19 countries in something we proudly refer to as the G20. Apparently the European countries didn’t get enough face time so they added the EU as the 20^th member. If your head is spinning at this point you may refer to the authority of all authorities – Wikipedia – for more information about the G20 at http://en.wikipedia.org/wiki/G-20_major_economies

The interesting thing about this most recent meeting in Russia is how the focus is on the US – and not just because of Syria, spying, and Miley Cyrus.  One issue has to do with US Federal Reserve policy. You know as a loyal reader of this blog that the Fed is talking about thinking about discussing and voting on the possibility that we might begin at some uncertain point in the future and in amounts not to be discussed in mixed company the idea of tapering. Tapering is now a four-letter word that brings out the worst fears in us. As a result of tapering discussions, the Eiffel Tower tilted and Al Gore admitted he did not in fact invent the whole Internet or fantasy football.

While I jest the truth is that the mere suggestion of reducing the rate at which we are dumping money into the US economy (think of water going over the Niagara Falls into a small cup) has already caused US interest rates to start rising upwards and hot money to flow away from many countries – and of course away from many G20 countries. The result is a chorus of countries singing in unison Amazing Grace. But I jest again. These countries sound like a chorus but the song is something more like the Everly Brothers’ Bye Bye Love or Hank Williams’ Your Cheatin’ Heart.

Despite triumphant announcements in 2008 that the emerging markets were finally de-linked from the US business cycle, we have seen how optimistic and wrong such pronouncements were. First they complained that the US was putting too much money into the world economic system. All that money was floating overseas and causing havoc in their financial systems and driving up their currency values. Now they complain of the opposite. Just the mention of tapering in the US and money is exiting these countries in waves. This is driving down their currency values. Apparently they are not as de-linked as they previously thought.

What are we to think about all this howling?  First, we are guilty as charged. One does not have to live in an emerging nation to dislike a very unstable US monetary policy. We in the US disliked how the Fed flooded the US economy with liquidity and then has gone well beyond the prudent point to begin withdrawing this stimulus. The Fed has generated a lot of uncertainty and unnecessary economic gyrations so that banks can sit around with mountains of excess reserves and the Fed serves as Obama’s lap dog dutifully running out into the street and collecting as many bonds as the government can sell.

So we can all be critical of the US Fed. But wait – don’t the other guys have some responsibility? After all, it appeared that they were less reliant on the US economy when China became the Miss Piggy of global commodity demand… or when they diverted much of their international trade to a growing list of other countries as globalization created more international opportunities. Perhaps some emerging market ire should be aimed at China for its failure to continue 10% plus economic growth or to Europe for having almost no coordinated economic policy despite being called a “European Union”. In short, these emerging market countries might spread their dissatisfaction beyond US monetary policy.

But if we are going to play the blame game – let’s not forget that these emerging nations have some responsibilities when it comes to economic growth. Globalization makes possible huge gains as emerging nations exploit comparative advantage and compete for manufacturing locations and exports on a global scale. But as the last 20 or more years have shown, to benefit from those opportunities these emerging nations had to be competitive. This meant that they had to transform what were often highly centrally planned economies into more decentralized capitalistic systems. These countries deregulated prices and wages; they privatized many formerly state-owned enterprises; they changed laws so that property could be protected and they allowed foreigners to own domestic assets and companies.

Some countries have moved farther along the transformation curve than others. Depending on the politics, some have taken two steps backward after moving forward. And this lack of completion of transformation is very telling. When the US catches a cold many of these countries get pneumonia. Why? Because we all know that these countries do not have balanced economies. All their eggs – so to speak – are in one or a few baskets. It is great when you create a lot of employment and income by selling copper to China. But when China slows its purchases from you, it is not so great. You can’t love hot money inflows one day and then deplore them the next when funds flow out. Hot money is hot money. If you allow your economy to rely on hot money or on China then you have to take the good with the bad. Or somehow find more balance.

It is this balance that is so elusive to an emerging market. If exports to China or hot money flows create great benefits, it is tempting to want to keep the benefits flowing. But this growth strategy is unreliable and risky. Most countries strive for self-sufficiency while they enjoy the benefits of international trade and investment. But economic broadening comes slowly and often means slower growth as the economy adjusts from the very risky unbalanced model to one that is more stable. Broadening also means tough  new policies that essentially replace government edict and protectionism with capitalism and competition. It is easy to blame other for your misfortunes but these major emerging markets have no one to blame but themselves. Blame the Fed if you want to but get on with the transformation process.