G8 - Not That Great

The G8 meeting is wrapping up and there have been no surprises to speak of. The global economies and financial systems appear too fragile to begin reversing the emergency measures. There were the usual platitudes about completely the Doha trade round and promises to avoid protectionism. Of note, especially in light of the various comments in recent weeks from assorted officials warning that currency appreciation would jeopardize their economic recoveries or in other ways underscored the benefits of soft currencies,the G8 encouraged countries to refrain from competitive currency devaluations.

After rejecting initiatives by the Chinese and Russians (according to news reports) to formally discuss reform of the international monetary order to reduce the role of the dollar, the G8 draft indicates support for a "stable" and "well-functioning" international monetary system.

From the sidelines of the meeting, a spokesperson for the Foreign Ministry reaffirmed that China supports creating a diversified international reserve currency. This is hardly news. Numerous officials, even in countries like China, Russia and Brazil recognize that what they want is not reasonable or possible in the short run.

Going forward, while the talk is likely to persist, as the political benefits are positive for China, as we are not talking about how the yuan has essentially been re-pegged against the dollar, or how Chinese consumption as a percentage of GDP has fallen, or how incredible growth loans (doubled in June from May have already surpassed the full year goal) may be fueling over-investment and an asset bubble of their own.

That said, this week's developments in China, especially the social unrest that led to President Hu's early departure from the international gathering in Italy and the detention of several Rio Tinto employees on "espionage" charges illustrates that the yuan itself and China are not in a particularly strong position to challenge the role of the dollar or the U.S. in the world economy any time soon.
G8 - Not That Great G8 - Not That Great Reviewed by magonomics on July 09, 2009 Rating: 5
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