THE G-20´S "REBALANCING" ACT / THE WALL STREET JOURNAL REVIEW & OUTLOOK ( A MUST READ )

REVIEW & OUTLOOK

OCTOBER 24, 2010.

The G-20's 'Rebalancing' Act

Dollar devaluation is not a global growth strategy

The Group of 20 finance ministers emerged from their weekend powwow in South Korea declaring themselves to be united firmly against the "competitive devaluation of currencies." We're glad to hear it. At the same time, however, they all but declared that the U.S. dollar should continue to decline in value while China and other countries should revalue. Apparently flooding the world with dollars in the name of reducing the U.S. trade deficit doesn't qualify as a "competitive" devaluation.


That contradiction wasn't lost on German Economy Minister Rainer Bruederle, who got to the heart of the matter by questioning the U.S. Federal Reserve policy of further monetary easing. "It's the wrong way to prevent or solve problems by adding more liquidity," Mr. Bruederle said, coming the closest of all the assembled worthies to mentioning the dollar devaluation that is at the heart of the world's currency turmoil. But the German was singing solo.


The upshot was a G-20 conclave that claimed success in addressing the wrong problem it has wrongly diagnosed. Instead of addressing the monetary roots of exchange-rate fluctuations, the finance ministers put their focus on addressing what they called "excessive" trade "imbalances." The cause of all turmoil, in this view, is that some countries run trade surpluses and others run deficits, and the key to restoring stability is getting those imbalances closer to zero.


How that miracle will be accomplished the ministers didn't say. But the clear implication is that the U.S. will continue to print dollars until China and other surplus nations with currencies pegged to the dollar cry uncle and revalue. As for Europe and those countries whose currencies float against the dollar, they'll have to decide whether to join the Fed's easing binge or accept rising currencies too. This is a recipe for more currency turmoil, not less. And it is likely to drive more capital, not less, to Asia and elsewhere other than the U.S.


Treasury Secretary Tim Geithner's focus on "rebalancing" is a case of inspecting the wrong end of the horse. The real problem with the global economy is that most of the developed world, in particular the U.S., isn't contributing as much as it should to the current world expansion. The solution is pro-growth policies in America to create more jobs and attract more capital.

Mr. Geithner can't acknowledge this because it would mean repudiating his own Administration's economic record. So instead he wants to blame faster-growing economies like China, South Korea and Germany for exporting too much. We certainly agree that China and Germany could do more to encourage more domestic economic demand. But devaluing the greenback to steal exports from other nations isn't likely to win more policy cooperation.


In any event, how do the world's would-be central planners know what is the ideal trade surplus or deficit? Many factors determine the competitiveness of a country's exports, including productivity, wage flexibility and more. Should nations like Germany that have run prudent fiscal policies, reformed their labor markets and raised productivity be chastised for exporting more goods than they import? Should countries like Australia be penalized for selling natural resources to a developing China that needs those imports to fuel growth? Should China be punished for exporting cheap goods to willing U.S. consumers?


Mr. Geithner didn't offer answers to these questions, preferring instead to put a finger to the wind and pick a 4% of GDP limit on surpluses that he would like the International Monetary Fund to monitor and enforce. But why 4%? Even IMF chief Dominique Strauss-Kahn—always a booster of a bigger role for his agency—demurred when asked about the practicality of such a plan and committed instead to have the IMF "work" on the issue. In their Saturday communique, we're happy to say the G-20 finance ministers gave Mr. Geithner lip service on this score but no firm commitments.


There was a time when U.S. officials understood that focusing so much attention on trade deficits and surpluses was counterproductive. In 1976, an advisory committee to the Treasury that studied the international economic accounts concluded: "The words 'surplus' and 'deficit' should be avoided insofar as possible . . . These words are frequently taken to mean that the developments are 'good' or 'bad' respectively. Since that interpretation is often incorrect, the terms may be widely misunderstood and used in lieu of analysis." The world could use such wisdom today.

We appreciate that Mr. Geithner wants to re-establish U.S. economic leadership, but the rest of the world isn't likely to listen as long as it believes the main U.S. growth strategy is a cheaper dollar. The world doesn't need finance ministers micromanaging the "right" level of trade and capital flows. What the world needs is a more robust and durable economic expansion, above all from America.


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