G-20 Wants less Export Dependency, more Domestic Demand

With the global financial mess escalating and volatile markets speculating currency and bond values, it’s convenient for global financial leaders to convene and discuss solutions. I’ve been listening closely to these G-20 discussions, and some good points are finally being brought up. The issue of deficit reduction is a first step. Everyone knows that this is a major problem; certainly as the sovereign debt crisis spreads across the Euro zone. More countries, such as Hungary, are now stepping up to alert the world of their financial concerns of unsustainable debt. Central banks and bondholders are working to relieve these issues, and the G-20 is proposing ideas on how to calm financial markets. The idea of a universal bank tax was shut down. The new idea that has some potential is for larger capital holdings so that taxpayers will be protected in the event of another bailout. Canada is weary of this new proposal because their banks are already subject to strict regulation. Universal regulation does not work well with certain countries that have specific economic conditions.

Most of the financial ministers warned about the unsustainable approach for recovery by relying on exports. This explains the risk factor in export based economies. These remarks are a direct blow to countries like Australia and Canada. Despite rising interest rates, and stronger export numbers, the Australian dollar took a major nose dive recently because of worry about risk. Not only the risk of the global financial crisis, but their export dependence and the need for domestic growth. Perhaps exports are fueling a domestic recovery, but how long will that last? China will not always demand commodities at such a fast pace. The Chinese realize that they are importing too much, and must balance a trade deficit by exporting more. Bad news from China directly affects the Australian economy.

But it’s hypocritical for the US to call out other countries for relying too much on exports. Obama vowed to double exports in his State of the Union address, and we have continuously placed pressure on China to allow their yuan to appreciate so that the dollar will be more attractive to the international trade market. A stronger dollar in response to the Euro crisis did not help with this goal of increasing exports. However, the appreciation of the yuan might help. The Chinese yuan is pegged to the dollar (buying US dollars to regulate their currency value), so the free markets don’t have much say in the true value of the Chinese currency. The US has even accused China of manipulating the value of their yuan.

Trade will definitely help with boosting the economy, but the G-20 members are correct that domestic demand must pick up to sustain a recovery. Meanwhile, Fed Chairman Ben Bernanke is speaking out about the domestic economy. In a speech this week he warned that unemployment numbers may remain high, but the Fed will raise interest rates ahead of a recovery. The markets anticipate a rate increase during the first quarter of 2011. Following the G-20 advice; a stronger domestic economy should be our main goal. --below is a chart of China's Balance of Trade: