The G20's New World Order
G20 statements, like all of God's creatures, need love too...
"LANDMARK FINANCE SUMMIT sets New World Order," reports Deutsche Welle. "Summit of lies," counters Italy's La Repubblica, says Dan Denning of The Daily Reckoning Australia.
The beauty of integrated global financial regulation is in the eye of he who gets to make the rules, apparently. The G20 summit in Washington on the global crisis has come and gone. What did it leave behind?
More tax cuts. More government spending. Lower interest rates. That seemed to be the gist of things. The group will meet again in London on April 30th to make more rules and to-do lists. And you'd think that cutting taxes while also spending more at the same time, would...you know...increase government deficits. But the political imperative across the world is not to balance a nation's books or for a nation to live within its means, but to keep voters employed.
Why? Employed voters don't rebel. But you can't have more jobs without more growth. Thus the stimulating trifecta of tax cuts, lower rates, and more government spending.
The statement which the G20 released after its summit is the sort of thing only an accountant (or, perhaps, Kevin Rudd) could love. But G20 statements, like all of God's creatures, need love too. It made some good points about taking a look at how credit ratings agencies operate (and how they are regulated), as well as the transparency of the credit default swap market.
If you had to pick just three points to focus on from the report that could affect investors, however, they would probably be accounting standards, the IMF, and pro-cyclicality.
G20: Accounting Standards
You can detect an almost panicked plea by G20 leaders for accounts to figure out a way to value the "toxic collateral" that's poisoning the global financial system. But guess what? Whether it's fair-value or mark-to-market, accounts already DO have a good way of knowing what it's worth...and either way you add it up, it comes to less than what banks would like to value it at. Still, rather than realising losses, expect more bailouts and capital infusions for a large list of increasingly non-financial firms. We are all Socialists now.
Pro-cyclicality is central bank and economist speak for the fact that financial markets actually accelerate volatility in the real economy (as if the financial markets were not part of the real economy, but never mind...). The idea that somehow cyclicality can be removed from the economy by reforming the financial markets is a central planner's opium dream. It shows you how naive the expectations are for global harmonisation of regulatory, tax, and accounting standards.
G20: The IMF
So what about the IMF? Now that should be interesting. The International Monetary Fund may emerge as the first powerful institution in the New World Order, whatever that Order ends up looking like. It's worth keeping an eye on.
The emerging market nations (Brazil, India, China, Russia) and the developing world would like more say in how the IMF makes its loans and sets its conditions to the rest of the world. But for years, the IMF has been the tool of Dollar hegemony. You get bailout money in exchange for opening your markets to US and European trade. Today, however, the IMF needs more money to bailout bankrupt governments.
Though it is quintessentially an American institution, the IMF has to be funded by people who have money. Americans and Europeans can't fund it at the moment. But others could. Currently, those "others" are Japan, China and Saudi Arabia (the world's savers, traders, and oil exporters, respectively).
Now ask yourself why these countries would fund the IMF but not get a say in how its loans are made or what rules are used to make them. It's a kind of financial blackmail. "Give us your money or the world's financial system gets it," seems to be the tone of the message coming from Gordon Brown and Henry Paulson. "It's your money or the world's economic life!"
Something to watch for? Rubin's Bane. The growing role of the IMF might come back to haunt the very people and countries who pushed so hard for the expansion of that role. Under Robert Rubin and the Wall Street-US Treasury alliance, the IMF has been pushing for capital account convertibility for years. While trade barriers in goods and service have come down over the last twenty years, the IMF wants to open up the world's capital markets by removing barriers.
But here's a prediction. Capital account convertibility leads to greater capital flows AND increases the likelihood of financial panics and crashes. For example, right now, huge global capital flows are making their way into the US Treasury market. This finances the bailouts in America.
Should these capital flows reverse, however – as they could under the IMF's push for more liberal capital rules – then they have the ability to generate a tremendous crisis in the American economy. It would be a vast exodus from America's bond market into the global financial wilderness.