Economic diplomacy out the window

The U.S. is boxing China and other trade surplus countries into a corner, one that is not wholly undeserved, but using dubious methods with regards to their impact on the U.S. economy and the wealth of its citizens.

In a nutshell, the world needs to rebalance. Emerging market economies (and Germany) make their living off exporting to the U.S. and Europe, but the huge deficits in the U.S., U.K. and Spain led directly to the financial crisis in 2008. The deficits were unsustainable and . Now, in the wake of the crisis, the deficits are headed back up and central banks are pumping money again, a replay of the past decade. The U.S. needs job growth, however, and one way to get it is for imports to decline, so that more production takes place in the U.S.

If other nations will not cooperate, the U.S. always has the option of debasing its currency. Since the dollar is the reserve currency, however, and many exporting nations (mostly emerging markets) peg their currency to the U.S. dollar (most importantly China), U.S. money printing turns into money printing in emerging markets. While money printing only stems deflation in the slow to no growth U.S. of A, faster growing emerging markets are faced with asset bubbles and rising inflation. To use a bad analogy, the U.S. is going to kill parasites on its body by eating poison, hoping that they leave the body before the host dies.

The rest of the world is not happy with the poison pill strategy.

China tees up G20 showdown with US

Cui Tiankai, a deputy foreign minister and one of China’s lead negotiators at the G20, said on Friday that the US plan for limiting current account surpluses and deficits to 4 per cent of gross domestic product harked back “to the days of planned economies”.

“We believe a discussion about a current account target misses the whole point,” he added, in the first official comment by a senior Chinese official on the subject. “If you look at the global economy, there are many issues that merit more attention – for example, the question of quantitative easing.”
Sometimes quoted Chinese officials are not the ones in charge of making decisions. The media often quote them in the way that say, a U.S. Senator might be quoted on a topic, but the Senator may be in the minority party and have very little sway over the Senate, and even less with the President. With that caveat, the quote is a total rejection of diplomacy. The U.S. said it wants to discuss rebalancing, which will necessarily mean China is a topic of discussion, and China says let's talk about U.S. quantitative easing.

The Germans are also upset with U.S. policy:

“With all due respect, US policy is clueless,” Wolfgang Schäuble, German finance minister, told reporters. “It’s not that the Americans haven’t pumped enough liquidity into the market,” he said. “Now to say let’s pump more into the market is not going to solve their problems.”
And emerging market economies are obviously angry as well. Brazil's finance minister said the U.S. policy will not create jobs and only lead to problems for emerging markets, such as Brazil, who have to deal with hot money inflows creating bubbles in their economies. Brazil also plans to bring the issue up at the G20.

Given the prevailing social mood, odds to not favor a good outcome at the G20.

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