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Institute of International Finance Showcases ‘Prisoners’ Dilemma’

Posted by Larry Doyle on October 11, 2010 7:08 AM |

I first highlighted the quandary known as the ‘Prisoners’ Dilemma’ in January 2009. I have written a dozen separate commentaries on this economic ‘game’ over the last twenty-two months. Well, while this economic dilemma can be played out between two nations or amongst a wide array, the fact is the stakes of increasing protectionist policies and economic gamesmanship are rising. As aggregate private sector global demand for goods and services continues to decline, global governments are looking to jockey their currency values lower in order to capture a larger share of the international trade pie. While the jawboning in Washington is increasing, rest assured the jockeying overseas is just as fierce. Let’s review the thoughts of a neutral arbiter on this topic. The Institute of International Finance recently weighed in on this issue and wrote,

IIF Calls for Renewed Global Coordination to Resolve Critical Economic Issues. Urgent Actions Needed to Counter Unilateral Moves.

Institute welcomes progress on regulatory reform, but expresses concerns over emerging inconsistencies, risks of fragmenting the global system and likely economic impact.

Washington D.C., October 4, 2010 — Charles Dallara, Managing Director of the IIF, called for urgent action by a core group of the world’s major economies to broker agreements on critical macroeconomic and exchange rate issues. He said, “Sustaining growth and restoring confidence will require not only astute domestic policymaking, but an unprecedented level of multilateral coordination. It will also require action that transcends purely domestic short-term concerns.”

Mr. Dallara stated in a letter on behalf of the IIF’s Board of Directors to the finance ministers and central bank governors who will be meeting here later this week in the forum of the IMF’s International Monetary and Finance Committee, “The challenge for global leaders is to recapture the political commitment to decisive, coordinated action that made the London Group of 20 Summit (April 2009) successful in restoring confidence battered by the crisis-”and to use that commitment to take immediate and concerted policy measures within a multilateral framework. Market participants need to be convinced that the leaders of these major economies recognize their individual and collective responsibilities to work towards the goal of balanced and sustainable global growth.”

The IIF, representing over 420 member institutions headquartered in more than 70 countries, said the proposed core group of the world’s major economies needs to take actions leading to the broader support and engagement of the G-20 at the Seoul Summit in November and the IIF today highlighted a proposed agenda of specific actions to be considered. Mr. Dallara stressed, “Policymakers need to engage seriously in multilateral negotiation to deliver a set of consistent and mutually-reinforcing measures to address the problems–a communiqué of platitudes risks further undermining market confidence.”

The IIF policy letter highlighted the lack of upward momentum in growth in the United States, the Euro Area and Japan (the G3 countries). In a separate report today, the Institute noted the continuing relatively strong performance of emerging market economies. It stated that policy conditions in the G3 are contributing to substantial capital flows into emerging markets and, in some cases, adding to exchange rate and domestic credit market pressures. The IIF stated that net private capital flows to emerging markets, which amounted to $ 581 billion in 2009, are likely to total $ 825 billion this year and then climb modestly to $ 834 billion in 2011.

Why is capital flowing into emerging economies and from the United States? For a number of reasons including better growth prospects BUT do not discount the lack of protection our financial regulatory system has provided for capital in our nation AND the enormous fiscal mess created in Washington and in many of our state capitols. These realities are reflected in the ongoing plunge in the value of the world’s reserve currency, the greenback. How much longer until nations start calling for a change in that status?

Navigate accordingly.

Larry Doyle

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I have no affiliation or business interest with any entity referenced in this commentary. As President of Greenwich Investment Management, an SEC regulated privately held registered investment adviser, I am merely a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

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