The G8 has now become irrelevant. This is no longer a 'First World' crisis and so the G number has had to increase to 20. In the world that we live in today, the G20 actually matters, particularly if you believe that it will take a coordinated effort to defeat this global financial crisis.
That coordination began on March 8th when Eisuke Sakakibara, the eponymous 'Mr Yen' was hauled off the golf course from comfortable retirement to announce that he believed that JPY will trade between 70 & 100 to the dollar during 2009. At the time, the Yen was trading between 98-100 and weakening rapidly. The announcement was key to preventing it rising to in excess of 100.
So why would the Japanese government strengthen its currency to the detriment of its massive export sector? The truth is, is that there is no market for Japan's high quality goods and that there won't be for at least 18 months. The Japanese government recognises this and thus are more concerned with helping the US economy recover, than selling high end goods that won't be bought.
That is why the Japanese government wheeled out Sakakibara-san and why they have stopped selling Yen.
Unfortunately, this bonhomie does not yet extend to the other senior partners of the G20 nations. So what are their concerns?
According to UK newspaper, The Times of March 20th:
"The London meeting risks being overshadowed by a dispute between Europe and the US over public spending. A series of leaders at an EU summit led by Angela Merkel, the Germany Chancellor, refused yesterday to go along with American calls for greater borrowing and spending by Europe".
Historically, government spending in Europe is proportionately much higher than the US because of the welfare and healthcare safety nets. With unemployment approaching record levels, government exchequers are under enormous strain. Additionally, a high percentage of their national GDP is given directly to the EU.
The EU is not just France, Germany and the UK. There are 27 nations within the community including the highly vulnerable Eastern and Central European bloc. The Western European economies cannot afford to bankrupt themselves to save Hungary and Lithuania, therefore expect a greater role for a refinanced IMF.
From the Wall Street Journal:
"Chinese Premier Wen Jiabao expressed concern over the outlook for the U.S. government debt China holds, urging Washington to take effective policies to restore the American economy to health".
“We have lent a huge amount of money to the U.S., so of course we are concerned about the safety of our assets. I do in fact have some worries,” Mr. Wen said in response to a question. He called on the U.S. to “maintain its credibility, honor its commitments and guarantee the safety of Chinese assets.”
If the Japanese and the American central banks are coordinating their efforts to weaken the US dollar, then that will have a direct effect upon the value of China's T-bills. A 10% reduction in the value of the dollar will reduce their value by the same amount. Thus the Mr Yen announcement of 70 Yen to the dollar must have sent shivers through their collectivist spines. However, the US is by far their largest market and China will see the wisdom of the Japanese position. The US recovery is in everybody's interest and by the conclusion of the G20, a coordinated strategy will hopefully be agreed with accomodations made to placate Beijing.
We should not believe that a drop in the value of the dollar is a mere devaluation, it is more than that. I believe that it is a coordinated revaluation, with the global community looking to reflate the US economy.
On Wednesday, the dollar dropped suddenly from ¥99 to ¥94 on a $1.2T purchase of long term government bonds and mortgage backed debt. There was an immediate systemic effect upon the commodity markets with gold and oil investors making significant gains.
Click the chart below to enlarge.
This is a precursor for what will come as the dollar drops in value. But what may be the most significant news this week was OPEC's decision not to cut oil production in order to raise the price per barrel.
Oil producing countries that have recently been suffering from the cheap oil price now only need to be patient. The oncoming fall in the value of the US dollar will bring back the good times as the oil price heads back to $100 per barrel.
No comments:
Post a Comment