Geithner's hidden G-20 agenda
By Hossein Askari and Noureddine Krichene
"The concerted and decisive actions of the G-20, with its balanced membership of
developed and developing countries, helped the world deal effectively with the
current financial and economic crisis. ... Reflecting on these achievements and
recognizing that more needs to be done to ensure a strong, sustained and
balanced global recovery, the G-20 leaders at [the September 2009] Pittsburgh
Summit designated the G-20 as the premier forum for international economic
cooperation ... Building on past achievements and close cooperation among
members, the G-20 will double its efforts in 2010 to help the world make a
successful transition from global recovery to stronger, more sustainable and
The description of the Group of 20 on the organization's official website is
designed to mask the facts that this is a self-appointed
body that has little legitimacy, has achieved precious little since it started
holding two yearly summits two years ago, and it provides a better forum for
the powerful to pursue their own agenda.
US Treasury Secretary Tim Geithner is becoming a master at juggling G-20
agendas to mask and push his agenda - short-circuit the market and support US
economic growth and job creation at the expense of East Asian economies and oil
and commodity exporters.
Geithner's disruption of Southeast Asia's export-oriented economies will not
solve the US economic crisis, which is deeply rooted in US economic and
financial policies. Disruption of Southeast Asian economies could have serious
consequences for them and for the rest of the world that has enjoyed
competitive and affordable goods flowing from China, South Korea, Malaysia,
Singapore, and the like.
The toll would be high on a number of countries in Southeast Asia that are
fully integrated into the global economy and have followed an export-oriented
growth by developing their competitiveness. The toll would be equally high on
many consumers around the world, including those in the US who could see their
Japanese cars and Chinese products disappear from the market, thanks to
Geithner's trade-capping agenda.
Geithner's agenda to entrust China, Japan, and other trade surplus countries to
International Monetary Fund tutelage is a plan that can but only increase
global recriminations and economic tensions. Capping the trade surplus of oil
and commodity exporters could have similar results and reduce the availability
of oil and other commodities and bring on higher prices.
Geithner has been the proud manager of the largest peacetime fiscal deficit in
US history, at about 13% of GDP, and a rapid build-up of US national debt. The
Federal Reserve has just announced its intention for a new round of monetary
easing. These policies can only make the US external deficit more problematic.
They will erode US exports and step up imports. Through setting interest rates
at zero bound and mounting trillions of dollars in liquidity injection, the US
has deliberately depreciated its currency and sparked the race in competitive
The dollar has depreciated significantly versus gold, the yen, euro, and a
number of other key currencies. Yet the dollar's depreciation has not promoted
US exports, engineered a US export-led recovery, or reduced the US external
Capping the trade surplus of oil producers and emerging market countries, as
urged by Geithner in South Korea last week while attending a gathering of G-20
finance ministers, will not expand US exports and will not improve its current
Markets do not limit US exports; there are simply not enough US goods left for
export. The US consumes too much and produces too little. It would be naive to
believe that US farmers would not produce and export corn and wheat at such
high prices if there were sufficient cereal and bread in US stores. The
priority for Geithner should be to change US policies and not force a
counterproductive change on other countries.
By attacking surplus economies, the G-20 has yet again highlighted its
illegitimacy as an organization pulled out of thin air by some of its powerful
members and its irrelevance in a world that needs more cooperation and trade
and less recrimination and barriers to trade. As in the past, the G-20 has been
misguided in its approach.
Under the influence of the Barack Obama administration, the G-20 has called for
unlimited fiscal deficits and monetary expansion. A number of G-20 countries
have disavowed fiscal profligacy despite strong US pressure to maintain these
policies until full recovery is achieved, with fiscal balance only as a
long-term objective. Instead, many countries have embarked on reducing their
fiscal deficits in spite of the social unrest that austerity programs have set
off in Greece and more recently in France.
Unlimited monetary expansion is causing high instability in exchange rates,
which will be damaging to trade and investment. By engaging in a zero rate
interest policy, the US is directly forcing the dollar into free fall. By the
same token, it is setting off countervailing reactions in the form of currency
depreciation and capital controls in emerging market economies.
Geithner's agenda is misdirected. His priority should be to re-establish US
fiscal and monetary discipline. Curtailing the trade surplus of well-managed
countries will only make the situation worse for the US and the rest of the
world. The US was able to finance its fiscal deficits through the surpluses of
these countries. In the absence of these surpluses, the rate of inflation in
the US would have been in the double digits as was the case in the 1970s.
Recently, a number of prominent economists, such as Joseph Stiglitz, Allan
Meltzer and Robert Mundell, have expressed concern regarding US policies.
Still, the Fed continues to be addicted to its loose monetary policy, and is
spreading more financial instability in US and around the world.
The G-20 should be an elected body with legitimacy.
It should recognize what is urgently needed for all countries and what is
politically and economically feasible.
The most urgent priority is to renounce a decade long loose monetary policy.
Leading industrial countries should renounce quantitative easing and near-zero
interest rates and revert to controlling monetary base within safe limits.
They have to renounce controlling interest rates as under the Reagan-Thatcher
era and regain monetary stability and a cooling off of asset and commodity
There should be a call for reserve currency central banks to realign their
interest rates with those prevailing in some emerging countries so that a
measure of exchange rate stability can be established.
Interest rates in the interbank market of most emerging market countries are
above 5%. In contrast, the US near zero-interest rates will remain a powerful
destabilizing force. The beneficial effects of monetary stability will be the
renewed confidence of entrepreneurs and companies to increase their real
investment and for speculators to retrench.
Trade imbalances should not be addressed by anti-market approaches, such as
capping surpluses. Trade imbalances have been on the international agenda now
for many years. They are structural and have little to do with exchange rate
Trade imbalances could not be corrected in one meeting of the G-20 in Seoul.
Today's trade surplus countries were large deficit countries when Europe and
the US were large surplus countries. It took decades of development and export
promotion for these countries to be become trade surplus economies. Most of
Southeast Asia's exports are consumer goods at competitive prices. Their export
to Asia, Middle East, and Africa is not displacing American or European
exports; curtailing these exports will deprive consumers in parts of the world
from buying affordable goods.
Curtailing Japanese car exports would hardly help US car exports. The US has an
edge in aviation industry, heavy engines, and farm products. Other countries
have an edge in textiles, shoes, and other consumer goods. Changes in exchange
rates will not dramatically alter the volume of exports. Disrupting trade could
have deep consequences in a number of countries.
The US external deficits are structural and are also related to the role of the
dollar as a reserve currency. US external imbalances long preceded China's
trade surplus - trade is multilateral and cannot be attributed to any single
country, and imbalances cannot be solved by interfering into the exports of
other countries. The US external imbalances can be solved only by the US itself
through reducing its fiscal deficits and restraining its monetary policy.
The distinguishing feature of a reserve country is that it can run external
deficits forever and without tears, that is, without paying in real resources
for these deficits, as long as other countries will accept its currency as
Other countries had to develop exports to pay for imports, the US did not. It
simply printed money to pay for exports as the case is now. Greece could not
print money and had to curtail its external deficits once others would no
longer lend it money. The US external deficits will persist and grow larger as
long as the dollar is a reserve currency.
The G-20 has been dominated all along by the misconception that the world is
simply constrained by demand, and that US and Europe economic recovery should
be just based on expansion of demand. Therefore, the simplicity of Geithner's
view and of European supporters is that if only China renounces its exports,
the US and Europe will grow on the strength of higher exports.
But every country, including the US, can promote exports if they can compete in
terms of price and quality and it has enough resources for investment and
enough goods left for exports.
Flashing indicators including the eruption of the gold price to near US$1,400
an ounce, the free fall of the dollar, the abundant liquidity, and commodity
inflation have not impressed the G-20. Its agenda has instead been deflected to
topics such as trade imbalances, which are deeply structural.
The urgent priority is to avoid marching down the same road that in the first
place led to financial and economic turbulence of 2007-2010.
Hossein Askari is professor of international business and international
affairs at George Washington University and Noureddine Krichene, who has
a PhD from UCLA, is professor of finance at INCEIF in Kuala Lumpur.