G20 in Seoul
Correspondents report that the U.S. is on the back foot at this summit and does not exhibit the clout of previous summits. This is not surprising. In the height of the crisis the priority was to stop a global financial collapse. Now it is how to build recovery. In determining that path, knowing what went wrong is critical. The view of the economies which relate to events in Britain and America is different to the one prevailing in Asia, where a strong recovery is well and truly under way. In China, India, South Korea, Singapore and down to Australia things are going rather well.
There are then, three problems. One is Japan which has been in trouble for years because China, Korea and Taiwan can produce the same stuff for its markets for less. It allowed its cost base to become uncompetitive in mass consumer manufactures and electronics, were cost is everything.
Another is Mediteranean Europe, where governments borrowed to oblivion, fooling their populations that they were delivering prosperity which was illusiory, while smothering them in benefits which could not be paid for. The third and critical issue is centered on London and New York. Here were the twin epicentres of a complete collapse of an economic model which had hitherto dominated the world financial system.
There remains in the City and New York a good deal of denial. In Westminster and Washington there is a slow awakening, but little of this has translated into new economic thinking; to the extent that it has, the Coalition is ahead of the White house. Among the people and businesses of these two countries there is a faster awakening, which is why the fiscal conservative alliance with the small government Tea Party inflicted a drubbing on Obama. Here George Osborne is a monetarist, so we already are embarked on a tight economic path.
The argument, however, has shifted to trade imbalances and currency rates. Here there is confusion. The mantra that if only the Chinese would let their currency rise all would be well, is both mistaken and misplaced. China’s currency is rising, but at a manageable pace and its trade imbalance is reducing, but it will not, rightly, accelarate the process to get the U.S out of a hole. It does not have to. It is now a financial super power. Indirectly it now controlls the U.S economy. It will not ruin it because it is valuable to it, but it will not disadvantage its own economic ambitions and its need to raise the standards of its own people in the process.
The U.S. and to an extent the U.K. have to get used to this. It will not change. What can change is our perception of the opportunities it presents to us. Again Cameron, Osborne and Cable are now ahead of the beleaguered Obama. The issue is not the the Chinese currency is too low. It is that Anglo Saxon costs have risen too high. We have manged to do something really spectacular. We have priced ourselves out of our home markets.
A major cause of this disaster which will take a long time to correct, as so often hammered home by this Blog, is the excessive cost of housing which has been allowed to inflate way above and beyond the natural economies of both the UK and the US as a whole, creating an illusion of wealth and fuelling expansion on borrowed money. This causes the cost of living and therefore wages, to be way above the world market level and in a global market, that is a downhill road. So we cannot compete. Moreover in the £10 trillion projected debt for the UK for 2015 (see previous post), most is secured on property. This means assets cannot be sold to pay it off because a mass sale would reduce their value. We have to earn the money to pay.
There is no quick fix to this. It is our own fault, not China’s. But China has benefited as have the other cash rich Asian economies. For that reason they will help us get out of this mess, but in their time and in their way. Because they are now the masters. Germany has seen this. That is why their workers are on overtime to meet orders from China.
Time to stop arguing about currencies and get down to work.