Your run-of-the-mill G8, G20 or IMF summit.

The Group of 20 (G20) met in Scotland over the weekend, bringing together central bankers and financiers of nineteen countries, and the European Union (EU). The collection of nations constitute 80% of world trade and two-thirds of the world’s population. (1) Discussions of “re-balancing” the world economy have taken place over the last few months by members of the G20. Those sentiments continued this weekend in St. Andrews, but apparently only in general terms. (2)

In restoring economic harmony, leaders and central planners hope to balance fund flows, surpluses and savings rates across nations. By doing so, they feel they can restore a collective parody through balanced, sustainable growth, and minimize the run (or retreat) on particular currencies. The concerns seem to be as follows:

1) “Too much” money is flowing into emerging economies, and will cause the currencies of those nations to inflate

2) Countries like China, that run surpluses, have export-led growth and high savings rates, will further distort current account balances in other nations

In general, money flows into countries where investors believe they will earn their required rate of return. Emerging countries offer value and growth opportunities, with affordable labor costs. The IMF telling investors not to invest capital in emerging countries, and instead invest in more expensive nations, is like telling your mother to skip over the cheaper refrigerator at Costco, and instead buy at a 15% premium from Mom & Pop Appliance. Money flows places for a reason.

Current account balances equal a country’s trade balance, plus net interest and dividends, and foreign aid.

The G20 hopes to rally member nations to set national policy goals ranging up to 5 years. Their theory is that with these economic blueprints, countries would interact with one another in the most efficient means possible, and a sustainable growth would be achieved for all. Metrics for these five-year plans could include growth rate, balance of payments, budget deficits, and employment, but nothing has been decided. (2)

This is fairly problematic. Does any country really know what their economy will look like in five years (unless you’re a dictating oil-exporter)? Of course not; economic agents perpetually change and adapt to a tsunami of market conditions (including government policy). And furthermore, nobody knows what breakthroughs will be made, or new industries created (not to mention new bubbles popped).

The men, the myth, the legends...

Who would be responsible for rubber-stamping these national economic plans, or offering suggestions to make sure they’re “consistent” with one another? (2) Boy, this sounds like a job for the International Monetary Fund (IMF). In fact it is; the G20 has requested plans for monetary, fiscal and other policies to be submitted to the IMF by the end of January 2010. (3) The IMF will offer an “analysis”, but it is unclear what that really means for participating countries.

For China, it probably won’t mean a whole lot.

China produces products and sells them to other countries, and then saves their money. Economically, China is playing from a position of power, despite increased debt spending as of late, mostly on infrastructure, manufacturing and real estate. Given the fact China holds roughly $800 billion in US Treasurys (5), and they fret on a daily basis about US fiscal policy, it’s quite a stretch to believe they will repeat the same mistakes.

But Federal Reserve Chairman Ben Bernanke urged China to change their ways, and increase their consumption, in a speech made on October 19th. Said Bernanke:

“Another set of lessons that Asian economies took from the crisis of the 1990s may be more problematic. Because strong export markets helped Asia recover from that crisis, and because many countries in the region were badly hurt by sharp reversals in capital flows, the crisis strengthened Asia’s commitment to export-led growth, backed up with large current account surpluses and mounting foreign exchange reserves. In many respects, that model has served Asia well, contributing to the rapid growth rates in the region over the past decade. In fact, it bears repeating that evidence from the world over shows trade openness to be an important source of economic growth. However, too great a reliance on external demand can also pose problems. In particular, trade surpluses achieved through policies that artificially enhance incentives for domestic saving and the production of export goods distort the mix of domestic industries and the allocation of resources, resulting in an economy that is less able to meet the needs of its own citizens in the longer term.” (4)

Bernanke also warned of “ever-increasing and unsustainable imbalances in trade and capital flows” for the rest of the world. (4) But does China really care? Probably not. And, better yet, is the oppressive Chinese government all that concerned with the mix of domestic industries and allocation of resources which result in an economy better able to meet the needs of its own citizens? Doubt it; not as long as little girls continue to become gymnastics robots and win gold medals. China will continue to act in their own self-interest, like any economic agent does. Only China is a country with far less freedoms than the U.S. They do not have to change. The U.S., and other debt-ridden nations, want them to change.

In any event, central planning on a global scale doesn’t seem to be going anywhere, anytime soon. Groups like the G20 and the IMF will tell us central planners are necessary to avoid the pitfalls of capitalism, future collapse of the financial system and market unpredictability. Intuitively, we know that mixing and matching five-year plans of the world’s largest economies will be extraordinarily inefficient. The individual plans themselves will prove to be utterly inaccurate. There’s a reason that any length of time greater than a year is referred to as the “long-run” in economics: it’s downright unpredictable at that point. Economies are intensely complex, with millions of people and an infinite number of moving parts and conditions.

Somehow, telling economic stalwarts to be more like the US and EU, seems like a laughing matter. Likewise, thinking that a group of central planners will pull the strings on fund flows, to manage currencies and current accounts on a global scale, is just as funny.

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(1) G-20 major economies – Wikipedia.org, retrieved November 8th, 2009, http://en.wikipedia.org/wiki/G-20_major_economies

http://en.wikipedia.org/wiki/G-20_major_economies

(2) G20 to seek progress on world growth scheme – Reuters.com, retrieved November 8th, 2009, http://www.reuters.com/article/topNews/idUSTRE5A13CQ20091103?feedType=RSS&feedName=topNews

(3) G20 leaves door open for fresh pressure on dollar – Reuters.com, retrieved November 10th, 2009, http://www.reuters.com/article/ousivMolt/idUSTRE5A71XS20091108?pageNumber=2&virtualBrandChannel=0

(4) Asia and the Global Financial Crisis – FederalReserve.gov, retrieved November 8th, 2009, http://www.federalreserve.gov/newsevents/speech/bernanke20091019a.htm

(5) MAJOR FOREIGN HOLDERS OF TREASURY SECURITIES – Treasury.gov, retrieved November 11th, 2009, http://www.treas.gov/tic/mfh.txt