No G20 Stimulus Sets the Stage for Structural Reforms

Economics17 Comments

All Tools Will Be Used as Momentum Builds for Multilateral Framework

By JC Collins

"We will not target our exchange rates for competitive purposes.”

The G20 Communique from this weekend’s summit in Shanghai was very clear on the agreed upon multilateral approach which will be required to transition the international monetary framework to a multi-currency system.  The above quote from the G20 statement is one of many straightforward approaches which is being taken by the largest economies in the world to increase global growth and address vulnerabilities.

The statement itself moves away from the anticipated stimulus and more towards structural reforms.  This has been predicted here on POM for over two years as we have previously reviewed that stimulus policies, such as QE, would be coming to an end, and more structural framework changes would be taking place.

One of the repeated themes over the weekend was the fact that multiple rounds of stimulus by central banks and government treasuries are no longer effective.  The need for structural monetary reforms is now a priority and movement towards those objectives should increase in pace over the coming months, and throughout the summer.

Chinese Finance Minister Lou Jiwei said in a news conference that the G20 nations will “use all tools – monetary, fiscal, and structural – to boost growth.”  He went on to say that “what each country does will be dictated by its circumstances.”

As such, some nations can afford further stimulus for a period of time, while others, with high debt, will need to move faster on structural economic reforms. The agreement to not implement across-the-board-stimulus is positive for the future of the global economy.  Stimulus is no longer effective and each nation has different requirements and challenges.

US Treasury Secretary Jack Lew stated the following:

"We need to redouble our efforts to boost global demand, rather than relying on the United States as the consumer of last resort.”

This shows the American willingness to work alongside other G20 nations on implementing structural reforms and moving towards a multi-currency reserve system.  All G20 members agreed to avoid “competitive” devaluations of currency, but we need to remember that any adjustments to the exchange rate of the USD will be considered agreed upon structural reforms. A dollar depreciation is still on the agenda for later this year, as it will mark the next major phase in the multilateral monetary transition.

This point will also be marked by an appreciation of the Chinese renminbi.  POM is one of the only sources predicting this RMB appreciation.

The G20 Communique is what I was expecting.  They have planted seeds for later in the year but have come to a base agreement on structural reforms and the need for the monetary transition.  The full statement can be read here.  Don’t take the doom and gloom interpretation of this communique at face value.  Read it for yourself.  Much more to come.  - JC

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17 Comments on “No G20 Stimulus Sets the Stage for Structural Reforms”

  1. The takeaway point of this summit is that the Prisoner's Dilemma is at play. Competition, not cooperation as Ben Hunt predicted.

    How many times did China deny RMB devaluation this weekend?

    They are going to devalue.

      1. It should be too obvious to even mention it that RMB has to (and will) appreciate vs. the $. "Planted the seeds for later this year", exactly.
        I perfectly agree with your analysis and would like to stress the concurrence of steps towards monetary reform and geopolitical events (in this case, the Syria ceasefire/ surrender).

        But there is one thing I'm not too sure about: You mention the stimulus efforts which are no longer effective - what efforts exactly? QE is no stimulus in most cases, unless if it concerns MBS, and in recent years there have not been major traditional stimulus programs.

    1. Greetings Mr. Grumps;

      I agree,,,They're going to devalue....

      Raoul Pal [Global Investors Fund] forecasts 50%....and that is only the smallest part of their problem.....DEBT over hang is way larger than anything on this planet...

      Take Care

      Tony

      1. Greetings JC;

        I particularly like the quote you picked out;
        US Treasury Secretary Jack Lew stated the following:

        “We need to redouble our efforts to boost global demand, rather than relying on the United States as the consumer of last resort.”

        To me the under lying message is that previous efforts have NOT been successful, and we are in fact in a structural Global deflationary collapse....
        You must remember that all debt is nothing more than future
        consumption...
        And with the Global debt over hang, there is nowhere to go but
        to have some type of monetary reset/re-alignment on currencies & debt, at some point in the not to distant future...
        A quick look at commodities should tell you something ""BIG"" is happening....Global consumption is faltering..and more debt CANNOT solve the problem..

        Take Care

        Tony

        1. Tony, you really need to read all the material on this site. Most of what you bring up has been addressed here many times, including sovereign debt restructuring.

    2. I read Ben Hunt's "The Silver Age of the Central Banker" ( http://www.salientpartners.com/epsilontheory/post/2016/02/19/the-silver-age-of-the-central-banker ) . He argues the world has passed from cooperation to competition in solving each countries particular economic, monetary, and political problems. We are now in the phase of competitive devaluation, after the BOJ and ECB initiated NIRP(negative interest rate policy) to devalue the Yen and Euro making their individual economies more competitive at the expense of other nations.

      "Chinese Finance Minister Lou Jiwei said in a news conference that the G20 nations will “use all tools – monetary, fiscal, and structural – to boost growth.” He went on to say that “what each country does will be dictated by its circumstances.”"

      It is clear each nation will pursue it's own best interest while working within a common framework. It is very interesting to observe without the pretense of knowledge....a little like high stakes poker.

      JC...there is a very interesting post on Seeking Alpha this weekend, "Oil: The Big Long". ( http://seekingalpha.com/article/3937256-oil-big-long ) I thought you might be interested in Chris Cook's take on whether supply and demand for oil have much to do with oil markets. Prediction of the future is difficult when we only read press releases!

  2. Hey J.C,did you notice the 11th point in the "issues for further actions"section in the communique:
    11-) We look forward to the IMF's report to examine and reflect on the possible broader use of the SDR by July.

    That's apparently three months in advance of October, the earlier determined period. That mostly strengthens your claim for commodities turnaround. So, the lack of attention to that point by media is interesting, isn't it?

    1. I did notice that as well. I will be writing more on it soon. It is a reference to more than just the RMB being included and the new weightings. It specifically targets a "broader use". This could cover major parts of the SDR and multilateral thesis which we have been discussing for over two years, including the substitution accounts and a large issuance of new SDR. Extremely interesting.

  3. Heroes Fall

    Wasn't that long ago
    One of my brothers stood tall...
    Never was sure of the call
    Became one of few, heroes fall...

    He climbed every tree in the yard
    Never complained, simply charge
    He played each and every card
    He merely would grin and try harder...

    He woke up each day with a smile
    The journey was more than a mile...
    Never asked nothing at all
    He was one of the few, heroes fall...

    -chorus-

    Casting aspersions away
    Nothing would get in his way...
    Still heard a beckoning call
    He earned his way
    Earned his way, heroes fall...
    -------

    Went to battle and serve in his way
    Saved many souls every day...
    The day came he was meant to stay
    Our Father welcomed him, it's time to play...

    -chorus-

    Casting aspersions away
    Nothing would get in his way...
    He still heard a beckoning call
    He earned his way
    Earned his way....

    Heroes fall...
    Heroes fall...
    Heroes fall...
    Standing tall...

    -fade-

    Written By: John Riley 1/23/16

    1. "Watch what they do and not what they say" laid over a photo depicting not being able to see the forest due to the trees....Excellent, thank you for sharing this Maud'Grumps.

    1. Why is that? China will not transition without some issues. To think that everything will evolve in perfect harmony is silly. Watch for the over-dramatization of things. Not ever negative event is sign of imminent market doom. Equally so, not every positive event is sign of market manipulation.

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