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G20 Summit Disaster Movie Re-run

Politics / Recession 2008 - 2010 Sep 28, 2009 - 07:41 AM GMT

By: Mike_Shedlock


Best Financial Markets Analysis ArticleNow that the G-20 economic summit is over, inquiring minds have a few questions on their minds:

1) Will the Group of 20 will be more effective because it includes important new players like India and Brazil, or will it simply be more unwieldy?

2) Will we wait and see what cooperation there really is before praising global cooperation?

3) Is there a credibility gap?

4) Haven't we seen this movie before?

To answers these questions let's look at a series of articles about the summit. Please consider Leaders of G-20 Vow to Reshape Global Economy

“We have achieved a level of tangible, global economic cooperation that we’ve never seen before,” President Obama said shortly after the summit meeting of 20 leading economies concluded here. “Our financial system will be far different and more secure than the one that failed so dramatically last year.”

The United States will be expected to increase its savings rate, reduce its trade deficit and address its huge budget deficit. Countries like China, Japan and Germany will be expected to reduce their dependence on exports by promoting more consumer spending and investment at home.

The ideas are not new, and there is no enforcement mechanism to penalize countries if they stick to their old habits. But for the first time ever, each country agreed to submit its policies to a “peer review” from the other governments as well as to monitoring by the International Monetary Fund.

For all the unanswered questions, the final communiqué covered an extraordinary number of complex financial issues. The leaders agreed, for example, to devise policies by the end of 2010 for closing troubled financial institutions that were considered “too big to fail.” They also agreed on the need to regulate financial derivatives, endorsing the approach proposed by the Obama administration in its bill to overhaul the regulatory system.

They also renewed their vow to give China and other Asian nations a bigger share of the vote at the International Monetary Fund and the World Bank. Asian countries have long complained that their stakes no longer reflect their financial contributions.

In another nod to developing countries, the leaders agreed to revive talks to reach a new global trade agreement by the end of 2010 that would, among other things, reduce barriers to agricultural exports. The goal may be optimistic: the Obama administration has shown no enthusiasm for new trade deals, and many Democrats want to see more protections rather than fewer.

The big question is whether the Group of 20 will be more effective because it includes important new players like India and Brazil, or whether it will simply be more unwieldy.

Obama's Premature Praise

President Obama is not waiting to see cooperation before praising it. Moreover, there is no enforcement mechanism, just numerous agreements to cooperate. Furthermore, history of round after round of trade summits have shown that agreements to cooperate and actual cooperation are two different things.

Indeed, actions are already speaking louder than words as Obama Risks Global Trade War With Misguided Tariffs.

That quickly addresses question #2 while leaving questions #1, #3, and #4 intact. So let's continue our quest for answers.

Consensus Building Lesson

Please consider G-20 Plans to End ‘Financial Balance of Terror’ After Summit.

President Barack Obama and fellow Group of 20 leaders are trying to end what Obama adviser Lawrence Summers has called the “financial balance of terror.”

G-20 leaders pledged to correct the lopsided flows of trade and investment blamed for contributing to the crisis: U.S. consumers borrowed money to finance purchases of Asian-made cars and flat-screen TVs. Asian exporters, meanwhile, invested their surplus cash in U.S. Treasury notes, pushing down borrowing costs and further fueling the credit binge.

Some economists cast doubt on the pledges by the G-20, since no sanctions will be used to enforce them and a similar push in 2006 by the IMF petered out.

The risk is that the larger group will find it more difficult to make decisions, said Tim Adams, who served as the U.S. Treasury’s top international official in the administration of George W. Bush.

“The bigger the grouping, the harder it is to get consensus,” said Adams, managing director of the Lindsey Group, a Washington-based economic advisory firm. “You can’t have the agenda taken over by the favorite hobby horses of each country.”

The bigger the group, the harder it is to get consensus. It's tough to argue against that logic, which answers question #1.

Inquiring minds are hoping to get all their questions answered so we must press on.

U.S., China Have a ‘Credibility’ Gap

Please consider U.S., China Have a ‘Credibility’ Gap on G-20’s Economic Pledge.

A push from U.S. President Barack Obama and Chinese leader Hu Jintao to shrink trade and investment imbalances is probably years away from being fulfilled, according to comments from their own officials.

“That’s not a simple thing to achieve, you don’t get that by writing a communique,” David Nelson, acting U.S. assistant secretary of State for Economic, Energy and Business Affairs, said in an interview. Ma Xin, an official at China’s government planning agency, warned that his nation’s “low” consumer spending is a problem that has “accumulated over many years and it is a structural problem.”

“Whatever the communique says, it’s up against a very, very difficult change for China to make, and they’re not convinced they have to make it,” said Derek Scissors, Asia economic policy fellow at the Heritage Foundation in Washington, said in a telephone interview. On the U.S. side, its record budget deficit means “we don’t have any credibility,” he said.

That nicely address the credibility issue. There is no credibility. Only one question remains.

An Old-Time Classic Rerun

If this move seems like an old-time classic it's for one reason only: It is an old-time classic.

For proof, inquiring minds are digging into select entries from the historical record of a League of Nations 1930 Chronology.

February 17-March 24, 1930

First International Conference on Concerted Economic Action:
In an attempt to reduce high tariff barriers and promote international trade, the League of Nations hosted a tariff conference in Geneva.

May 2, 1930
Dunning Tariff in Canada:
The Canadian government imposed the most drastic tariff revision since 1907, significantly raising duties on American goods while providing preferential treatment to British goods. The Canadians resented the high tariff rates the American government placed on Canadian goods, reflected in the Smoot-Hawley Tariff legislation.

May 13-June 7, 1930
International Conference for the Unification of Laws on Bills of Exchange, Promissory Notes, and Checks:
To promote international trade, the League of Nations sponsored a conference in Geneva to unify international laws dealing with bills of exchange, promissory notes, and checks.

June 17, 1930
Smoot-Hawley Tariff Act:
Despite the protests of economists, President Herbert Hoover signed the Smoot-Hawley Tariff which increased duties on raw materials from 50 to 100 percent over the 1922 schedules. American protectionism sparked widespread reprisals and retaliation against American goods around the world which further flared economic dislocations and deepened the global depression. By December 1931, 25 countries had retaliated against American tariff policy.

Inquiring minds are also digging into the historical record of a League of Nations 1931 Chronology.

February 23-March 19, 1931
Second International Conference on the Unification of Laws on Bills of Exchange, Promissory Notes, and Checks:
The League of Nations sponsored a second conference on the unification of laws pertaining to bills of exchange, promissory notes, and checks in Geneva in an attempt to restore international trade.

March 17, 1931

Collapse of the Tariff Truce Convention:
In light of the continuing global depression, efforts to reduce tariff barriers to promote international trade collapsed.

May 11, 1931
Kredit Anstalt Failure:
The global recession struck the European banking system when Kredit-Anstalt in Austria failed, threatening the economic and political stability of Central Europe. The banking crisis reflected the economic depression in Germany where more than six million workers were unemployed and contributed to the rise of Communism and National Socialism.

June 16, 1931
British Emergency Loan to Austria:
The Bank of England authorized the advance of 150 million schillings to the Austrian National Bank in an attempt to stem the bank panic in Europe, even though these funds were desperately needed in Britain. This banking crisis threatened to bankrupt governments, banks, and corporations around the world and the specters of Fascism and Communism mounted.

June 18, 1931
Hoover Debt Moratorium Proposal:
President Herbert Hoover of the United States proposed a debt payment moratorium of one year on all intergovernmental debt. American experts believed that an important factor in the world banking crisis was the difficult problem of transferring reparations and war debt payments between currencies. French political opposition undermined the effectiveness of the moratorium proposal.

July 6, 1931
Debt Moratorium:
After finally gaining French support, President Hoover announced that all of the important creditor governments had accepted the intergovernmental debt moratorium. The delay in action on the debt moratorium contributed to the closing of all German banks by mid-July.

September 17, 1931

German Creditor Agreement:
With the German government's inability to pay its reparations obligations, Germany's creditors accepted a "stand-still" agreement, which temporarily avoided a default.

September 21, 1931
British Withdrawal from the Gold Standard:
The Bank of England went off the gold standard despite a total of 50 million pounds in credit from the Federal Reserve Bank of New York and the Bank of France. The pound sterling fell from $4.86 to $3.49 as a result of the devaluation. Since many nations tied their national currencies to the British pound, the subsequent devaluation (especially in comparison to nations who remained on the gold standard) resulted in an export subsidy and temporarily stimulated trade. However, the overall result was that most countries eventually abandoned the gold standard, currencies devalued, and overall trade contracted exacerbating the global depression.

December 22, 1931
Dutch Tariff/Quota Increase:
In spite of a long history of free trade, the Dutch government increased the nation's tariff schedule and set up import quotas to help the nation's agricultural and dairy sectors, which had been hit hard by the Depression.

Although some scenes have yet to repeat, it's safe to say we've seen this movie before, including small details such as Tears Over Milk.

Because of the credibility gap as well as recent precedence in numerous failed trade talks, it's difficult to believe this summit will be any more effective than the ones in 1930 and 1931.

By Mike "Mish" Shedlock

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Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management . Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

Visit Sitka Pacific's Account Management Page to learn more about wealth management and capital preservation strategies of Sitka Pacific.

I do weekly podcasts every Thursday on HoweStreet and a brief 7 minute segment on Saturday on CKNW AM 980 in Vancouver.

When not writing about stocks or the economy I spends a great deal of time on photography and in the garden. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at .

© 2009 Mike Shedlock, All Rights Reserved

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29 Sep 09, 02:32

They came with huge current account deficits,fiscal accounts deficits and left as usual with a larger credibility deficit.

We may joke but at some point of time this will be an issue

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