International Monetary Troubles

Meeting tomorrow on Thursday 31st March 2011 in Nanjing, when finance ministers and central bankers from the G20 will meet to discuss about all issues except the elephant in the bath tub.

The central problem today with the international monetary system is the balancing of the flow of international trade and the international flow of money. In theory, surplus demand and surplus supplies will adjust so that a balance is always established in the end. Again, this is in theory. In the real world, none of this automatic adjustment exists except possibly in the commodity markets where specific commodities are produced with much competition from substitutes and where supply and demand conditions are fairly easy to predict as they are slow to adjust. Hence, a few traders can corner the commodity markets and hold the poor of the world to ransom, and the only adjustment the poor can make is to starve themselves.

The problem with international monetary imbalance is that, like the poor, deficit countries are under the greatest pressure to adjust only because they run out of credit to spend themselves out of their problems. What do you do when a poor uncle or a poor friend, dying of old age and dwindling income generating capability ask for help - once, twice and we imagine if we allow it, ad infinitum. We answer ashamedly, "I think I have helped you enough" while planning for our next vacation abroad.

One way that an international agency can step in to help the deficit country is to give it some credit when all other conventional lenders refuse to continue to give. The IMF tries to behave like the global central bank with the authority its own currency called the SDR (special drawing right) with funds from the deposits of central banks as "customers". The SDR is constructed like an index number and then its exchange rate determined based on that basket, and translated into the needed currencies like the US dollar for actual transaction purposes. In this way, the IMF steps in to ease the temporary "financial" problems of deficit countries while programmes are put into place the solve the "real" problems.

At the same time, the surplus countries are under no pressure to adjust at all, just like the rich who will only get richer because they have found a strategic advantage to benefit from the rest of the world. That strategic advantage for China may simply be sheer hard and intelligent work for minimal pay, very much reduced consumption and still have surplus to keep. It is simply a question of lifestyle, of a way of life. The poor may not be the destitute but simply those who have sufficient and who overspend. It is still lifestyle and bad habits. Do we then discipline the hardworking and be lenient with the spendthrift. It is not exactly that the US is poor and China is super-rich. Intra-China, there is also an imbalance where the rural poor worked hard for the urban capital-rich for the enjoyment of the deficit US consumers who pay for things with computer digits.

So, what are the adjustments or what are the "real" problems. Is it an exchange rate problem? It was OK before, but now it is not OK. If a people have worked so hard and so long to enjoy a bit of luxury, do you then ask them to adjust their currency so that they will have a work harder and enjoy less. Do you not ask the deficit country people to find new ways of doing things and produce new stuff so that they may have a fighting chance with selling their wares. Or do we allow specialisation of countries where countries like China, Japan and India produces real stuff while European economies produce financial crises.

Or, do we think that surplus countries will translate all their foreign reserves into domestic currency and flush the economy with cash in the real estate and the stock market. Or, do we not think that they will use the US dollar to buy US assets in the US - which the Japanese did in the eighties.

Or, are the issues to be discussed at the G20 really more about strategic issues such as not letting the East conquers the West just like the way the West had previously conquered the East. Is it not really about fearing the huge immigrant population in the US and Europe will forsake those countries and the productive but fluid labour force will float to the most competitive countries in the world and reforce the success.

Against such fundamental issues, we will find that the G20 could just be a meeting to air some issues "of global monetary importance" and then return home to placate the population that something has been done and things will take time to happen. In the meantime, adjustment is a slow cook.