Thursday, November 11, Armistice Day, the G20 gets another one of its economic arm-wrestling matches, otherwise know as a summit, underway in Seoul, South Korea. There is no peace in store for the attendees at the 11th hour on the 11th day of the 11th month, however, as the U.S strives to revive its economy by shifting the blame, and the pain to the rest of the world.    

The normally super-dominant U.S. contingent goes in a bit handicapped this time.  It seems that the rest of the world, particularly China and Germany, isn’t too happy with the Federal Reserve’s decision to try and export inflation to other countries in order to continue bargain-basement funding for the gargantuan spending, deficit, and debt that the United States government keeps running up.  Regardless, the American negotiators will try to convince the rest of the world to help our economy by damaging theirs.

In brilliant commentary, for government functionaries, world leaders continue to lambaste the plan, saying it will drown global markets with cash without doing anything to aid the U.S. recovery.  China’s Vice Foreign Minister Cui Tiankai said on Friday that the U.S. “owes us some explanation on their decision on quantitative easing.”  He further remarked that Timothy Geithner’s U.S. Treasury plan for limiting nations’ current account surpluses and deficits to 4% of gross domestic product hearkened back “to the days of planned economies,” a stinging rebuke from the avowed communists to the ersatz capitalists.

Artificially low exchange rates ultimately hurt everyone, German Chancellor Angela Merkel said in a newspaper interview published Tuesday.  Distortions on currency markets are also harmful to the global economy, the head of Germany’s governing coalition told the daily Die Welt ahead of the G20 summit in Seoul. German Finance Minister Wolfgang Schaeuble told a conference, “With all due respect, U.S. policy is clueless.”

Protectionism is high on the list of concerns of the attendees.  The Fed’s bond-buying program has deepened concerns that the U.S. dollar is headed lower, hurting exports from other countries.   A “trade war” could follow suit if the G20 fails to achieve a global solution for currency imbalances, Brazil’s Foreign Trade Secretary Welber Barral told Reuters.

World Bank President Robert Zoellick called for a new global currency system, perhaps with gold as a reference point.  The idea drew criticism from many policymakers and economists who realize that it would put a stop to the compulsive borrowing and money printing going on in the world’s economies.  Policy veterans discount the plight of Zimbabwe as being not possible in the enlightened and developed Western democracies.  Zoellick has repeatedly shown a fondness for issuing bold schemes to stimulate debate.  There is no evidence that a sliver or gold standard discussion will be on the G20’s agenda this week.

Looking back at history, last month Zoellick warned that the rising tensions over currencies could end badly.  “If one lets this slide into conflict, or forms of protectionism, then we run the risks of repeating the mistakes of the 1930s,” Zoellick told reporters at a press briefing earlier.  One liberal economist, being tied to the income and prestige of service to power, said that Zoellick may be the “stupidest man alive”.  Never mind that the only solution ever found to rampant devaluation of currencies and the economic trauma that accompanies it has been a move to money that is tied to commodities such as gold and silver.

The Fed doubled the monetary base in QE1 when it saved the big banks.  Now in QE2, they are saying that this had little effect on currency in circulation (because the banks hoarded the cash in excess reserves), so we think we can get away with it again.  Don’t worry about 30% more, they say, we are prepared to unwind these (atrocious) policies when the time comes.  We can manage this the same way we predicted the first crash and crisis.

The Fed is facing something that it has not faced since 1934: an economy that does not respond to a massive increase in the monetary base. The bankers are foiling the Fed’s policy. This has occurred before in 1934 to 1939.  The Fed increased the monetary base by 100%.  The money supply increased by 50%.  The economy fell back into recession in 1937 and did not recover until 1940, when British orders for weapons began stoking the fires of the economy

Look for the G20 representatives to bluster about the reckless actions by the Fed.  Look for longer term inflation in emerging market assets as the new money seeks returns that can’t be found in the U.S.  Look for exporting nations to counter the U.S policies by subtly modifying capital flow laws, like new percentage restrictions or taxes on international asset ownership.  The actions point to a currency war where all sides lose and the global economy devolves.

All of this makes for a continuing spiral into a vortex of doom where policy makers simply reject the obvious – that it is better to lose a few sailors to Scylla than to lose the whole ship to Charybdis.  U.S. officials will likely arm wrestle with international economic powers to score points while the ocean liner gets sucked down the whirlpool.  This is the world of politics – coercive economics.

In the world of voluntary economics, the Fed would not exist.  Banks would have to have hard assets to back their demand deposits.  In the realm of consumers and producers, money is merely the most marketable good.  It can be traded for any other good. Currency would be accepted based on its ability to hold value and its utility to sellers of goods.  Countries that print money without assets to back it would face rising prices as the value of their currency falls.  Countries that go into monstrous debt would be punished by the market with higher risk premiums in the form of interest rates.  Currency would no longer be backed by the ludicrous full faith and credit of a government with no assets or income, it would be backed by commodities of stable value available when requested.

Copyright © 2010, Jim Blandford.  All rights reserved.

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