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G20 and US: Going Separate Ways Highlights Prisoner’s Dilemma

Posted by Larry Doyle on June 7, 2010 8:25 AM |

As we continue navigating the global economic landscape, national interests are now overwhelming coordinated global interests. How so?

Unlike the coordinated message at the widely publicized 2009 G20 summit held in London, the clashing of widely divergent national views at the 2010 G20 meeting held in Busan, South Korea is hardly melodious. The implications for global markets will be enormous.

Last year, the U.S. swapped all sorts of favors for a coordinated global fiscal stimulus; this year, the U.S., represented by Treasury Secretary Tim Geithner, is receiving the cold shoulder. Finance ministers from around the world are happy to go their own way in pursuit of what they believe to be their national interests. Can you blame them?

These separate approaches are much more focused on restraining mounting national debts in an attempt to forestall potential sovereign debt crises like that seen in Greece and likely elsewhere in Europe. The early withdrawal of fiscal stimulus is Ben Bernanke’s greatest fear as he believes early withdrawal of fiscal supports was the precursor to the Great Depression of the 1930s. Can you say “rock and a hard place?”

This story should not be discounted. In fact, I believe it is a MAJOR turn in the road for our global economic landscape. That turn will likely result in more immediate pain and a slowing in the global economic recovery in an attempt to mitigate the aforementioned currency and sovereign fiscal crises. The Financial Times highlights this story this morning in writing, G20 Drops Support for Fiscal Stimulus:

Finance ministers of the world’s leading economies have been so spooked by the sovereign debt crisis that they have decided they can no longer wait until economies are growing strongly before they remove fiscal stimulus.

The meeting of the Group of 20 finance ministers and central bank governors in Busan, South Korea, at the weekend meeting also dropped proposals for a global banking levy, giving countries leeway to do what they thought best for their domestic circumstances.

The communiqué of the meeting made clear the G20 no longer thought expansionary fiscal policy was sustainable or effective in fostering recovery because investors were no longer confident about some countries’ public finances.

“Those countries with serious fiscal challenges need to accelerate the pace of consolidation,” it said. “We welcome the recent announcements by some countries to reduce their deficits in 2010 and strengthen their fiscal frameworks and institutions.”

More specifically, finance ministers from some of our closest allies, Canada the U.K., and France, have taken the lead in pushing the G20 away from the approach favored by the U.S.:

After the meeting, finance ministers acknowledged the landscape had changed. George Osborne, British finance minister, claimed credit for this shift in tone.

Many other finance ministers accepted market realities had changed the G20’s policy. Christine Lagarde, France’s finance minister, said: “There’s a large majority for whom redressing the public finances is priority number one. For a minority, it’s supporting growth.”

Meanwhile, Tim Geithner is coming home largely empty handed and you can sense his anguish:

In a letter to the rest of the G20, Tim Geithner, US Treasury secretary, argued: “Concerns about growth as Europe makes needed policy adjustments threaten to undercut the momentum of the recovery”.

In private, G20 officials said that the US had been the country most concerned about the new austerity drive and feared for the momentum for global growth. In the meetings it had been frank in the meeting in calling for China to revalue the renminbi and for Germany to boost domestic demand, officials said.

Mr Geithner, himself, was open about his fears in his letter to the G20. “Concerns about growth as Europe makes needed policy adjustments threaten to undercut the momentum of the recovery,” he wrote, adding that fiscal tightening won’t “succeed unless we are able to strengthen confidence in the global recovery.”

What I see at work here is nothing more than the next leg in the Prisoner’s Dilemma, in which individual interests trump collective interests. That is reality and that means borrowed funds are not going to be readily available to keep asset markets bubbled up.

Navigate accordingly.


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