The conclusion of the most recent G20 summit in Seoul last Friday, hailed as a success for political reasons by attending politicians, was punctuated with the following agreed upon statement: "Uneven growth and widening imbalances are fueling the temptation to diverge from global solutions into uncoordinated action... uncoordinated policy actions will only lead to worse outcomes for all." In other words, 'while we agree in principal that it is best to agree, we disagree.' I can only imagine that, if only the leaders of nations in times past, who with the specter of wars and economic strife looming before them, had been privy to such wisdom, things would have turned out exactly the same...
In spite of ambiguous political statements made in Seoul last week, markets have been remarkably unified in their response. Since markets closed on the Wednesday (Nov. 10) before the summit began in earnest, every single major US dollar denominated market has fallen. Several of these markets had been gaining steadily leading up to the G20 summit, but all have dipped in response to the G20's conclusion. Here is a quick statistical rundown of some of those losses up to the Wednesday Nov. 17 close:
Dow Jones -350 points (-3.1%);
S&P 500 -40 points (-3.2%);
NYSE Comp. -259 points (-3.3%)
Crude $/Brl -6.77 (-7.7%)
Copper $/lb -0.24 (-6.0%)
Gold $/oz -62 (-4.4%)
Platinum $/oz -97 (-5.6%)
Thus, money (or value) is coming out of stock and commodity markets across the board. Furthermore, Treasuries, both 30yr and 5yr notes, fell 1.5% and 0.9% respectively, during the same period; markets which often gain when stock markets are in turmoil. Taken in the context of a rise of 1.44 points (+1.9%) during the same period, in the US Dollar Index (USDX) which is a guage of the value of the dollar relative to other world currencies, we can reasonably assume that losses in the value of stocks and commodities are partly, if not mainly, a result of a strengthening US dollar. This represents deflation. What is the cause of this deflationary pressure? It could be that investors have responded to the G20's failure to resolve its differences over state manipulations in currency markets by pulling out of markets and deleveraging, or paying off debts. The US dollar being a debt-based currency, any net reduction in USD debts effectively reduces the amount of USD in the system, producing deflation.
Perhaps the dirtiest word in modern economics, many analysts of late, even Fed chief Bernanke, have begun to broach the issue of deflation. That it is impossible in America has been the misplaced hope of so many bank and fund chiefs. The Japanese banking crisis of the 1990s has resulted in persistent deflation for over a decade. The more recent global recession, particularly the crash in the summer of 2008, was a deflationary crash, which saw all markets lose value at break-neck speed after being inflated by Bush's bank bailouts and stimulus spending. That extra money was un-created nearly as quickly as it was created when it was used by large institutions to pay off debts and deleverage. So what to expect? With interest rates already at historical lows and failing to stimulate more borrowing, look for the Federal Reserve to enact more quantitative easing, the modern equivalent of printing money. This will complete another round in the cycle, and further consternate the US's G20 partners, especially China, who will see it as another salvo in the much denied currency war. However, if they fail to do so, fear of another credit crunch may trigger another US dollar exodus from markets everywhere, and the global 'double dip' recession will be upon us. It seems that there is no positive alternative, and no way out of the rabbit hole the US has dug for itself and the rest of us.
Perhaps the only thing keeping the floundering juggernaut of global finance afloat is the placebo effect of the actions of its masters who maintain a public image of confidence and certainty about their actions. If at any time any major player all at once goes bust or pulls their money off the table, everyone else may just decide to cash in. It seems since the summit, a few players at least, have decided to pocket at least a few of their chips, just in case.
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