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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