We Demand, They Supply

We watched the numbers for years, our minds numb with the litany of budget deficits – now well over $11 trillion – and trade deficits that up until recently were running $60 billion a month. We’ve always known that someday, this export-import trade imbalance will have its own “judgment day.” That “day” could be now.

With the G-20 nations finishing their April meeting, it becomes relevant to understand the differences among countries that have huge trade surpluses (major exporters like China, India, Japan and, believe it or not, Germany), those countries with gigantic trade deficits (major importers like, of course, the U.S. and the U.K.), and those developing nations whose economies struggle between an inability to pay for necessary imports and a harsh exploitation (of workers and natural resources) environment. The G-20 feels responsible to the latter, developing nations, if for no other than purely selfish reasons – to suppress terrorism, global instability and war.

Aside from the historical differences between continental Europe and the variations on the impact of the managed depression on our versus their economies (see my blog, “How Wide is the Atlantic?”), and taking the developing world out of the picture for a moment, the differences between “surplus countries” and “deficit countries” are vastly wider than the gap between Republicans and Democrats. Getting these two factions to agree on a uniform, globally-implemented path seems increasingly difficult.

Just keeping the world from destroying economic balance further, with a prevalent and popular thought of erecting new trade barriers, levies, quotas and duties to “protect” local industry, will prove a difficult task by itself. But think of the retaliatory measures that would be taken by countries like China , who hold trillions of our dollars in their coffers, if we slam them with trade restrictions! The impact on the dollar would redefine catastrophe.

Martin Wolf, writing for the March 31^st Financial Times, put it this way: “The Organisation for Economic Co-operation and Development now forecasts a 4.3 per cent contraction in the economies of advanced countries this year, followed by stagnation in 2010,” and adds that the schism between the two categories of nations presents an unresolvable dilemma: “Unfortunately, no consensus exists on the underlying causes of this crisis or on the best ways to escape from it. The US and UK agree that the excesses of the financial sectors have their roots not just in deregulation, but also in the massive excess supply of surplus countries, of which China, Germany and Japan (with respective current account surpluses of $372bn, $253bn and $211bn in 2007) are the most significant. But China and the continental European countries, led by Germany , argue it is all the fault of profligate deficit countries. Yet China also hopes that the world will soon be able to absorb its excess supply again.”

Wolf cuts to the heart of the problem, if surplus economies are to continue in the export business: “Logically, counterpart deficit countries must spend that much more than their incomes. Yet today deficit countries have run out of willing and creditworthy private borrowers.

“That change is what this crisis is all about, as the charts show. Between 2007 and 2009, the crisis-hit private sectors of the US, UK and Spain will, on these forecasts, shift their financial balances (the difference between their incomes and expenditures) massively towards surplus, as savings rise and spending is cut… The main offsets in these deficit countries will be huge jumps in fiscal deficits, although the current account deficits are also, inevitably, shrinking.”

Think China is aiming to reduce that surplus? Try this NY Times April 1^st (no fooling!) business headline on for size: China Vies to Be World’s Leader in Electric Cars. Hello – again – Detroit (is anybody there?). So what’s good for us is bad for them, and vice versa. Pundits predicted the G-20 would be a bust; French President Nicolas Sarkozy even threatened to walk out of the talks if they stumbled. With low expectations, what exactly was the result of the G-20 summit?

President Obama got credit as a consensus-builder – generally, the results were viewed as very significant (the markets soared), because the Americans and the Brits pretty much knew that getting new stimulus packages was not in the cards (they didn’t even try). Instead, they focused on common ground: 1. helping the developing world and generally stabilizing the international financial markets through a massive $1.1 trillion infusion into the International Monetary Fund (and ultimately the World Bank), 2. beginning a series of universal regulatory changes that will be commonly adopted by member nations (tighter oversight over financial markets and instruments, tying executive pay to performance, cracking down on tax havens and hedge funds, etc.) and 3. vowing to hold the line on protectionism (even going so far as to commit $250 billion in trade financing, a boon to the developing world).

The world is getting along. Good news, at last. We’ll deal with the “other stuff”… sooner or later.

I’m Peter Dekom, and I approve this message.