U.S. financial policies bear brunt of world discontent

Implications: Emily Kaiser (Reuters) in Washington reported in the July 7 issue of the International Herald Tribune that the rich nations of the world need help to cope with rising energy prices. Fuel protests in Europe and low levels of consumer confidence in the U.S. are political issues. Transportation fuel prices will be atop the agenda of the Group of 8 meeting in Japan beginning today. Central banks can do little unless demand falls in Asia. The European Central Bank (ECB) raised interest rates last Thursday but the U.S. Federal Reserve is not ready to raise U.S. rates with the nation near a recession. World leaders must find other ways to lower inflation. A solution is to curb demand in emerging economies. But their strength keeps the global economy growing. Developed countries should persuade them to stop subsidizing energy prices. China has surplus dollars and the government is willing to buy crude oil at higher prices and still continue to sell products at lower prices to citizens. 

Analysis:  Russia’s President Dmitri Medvedev has already announced before departing for the G-8 summit that the world needs a new international monetary agreement to bring exchange rates into alignment. Jean-Claude Trichet, president of the ECB has already done what he could do by raising rates last Thursday. Rhetoric, the staple product of G-8 meetings, will be shrugged off by much of Asia. China and India, as they see steady U.S. dollar depreciation, they will be encouraged to continue with existing policy, i.e., take in dollars as fast as possible and immediately use them to buy crude oil on the open market regardless of the cost. Russia has been quietly strengthening the ruble for at least a year. With a currency that becomes stronger all the time and a foreign policy whose centerpiece is command of energy sources (and markets), Russia, uncommonly gifted with two able statesmen, can only gain in international importance. The U.S can only wither as it continues to ignore the thoughtful opinion of its competitors in international commerce. This sad state of affairs is magnified by the American presidential campaign with both candidates fundamentally indifferent to world opinion and focused on narrow domestic crises which will not go away. It is too early yet to gauge the danger to the world that exists in these multiple conflicts of interests. Europe will have little choice but to grow closer to Russia and further away from the U.S. Asia as a whole is indifferent to the U.S. economic slide. As long as dollars come in which can be converted to commodities, both China and India will be content to let matters drift. Japan gets much of its crude oil from sources in the Persian Gulf. They too are willing to let the uncertainty continue as long as the oil supply holds up. Liquefied natural gas (LNG) plays a large role in long-range planning for all Asian nations. Supplies from Qatar and Iran appear secure and new sources are coming out of Australia. Smaller nations such as Thailand, Vietnam and the Philippines are in distress over high fuel prices but forces are in play to ameliorate their concerns. The outlook then is for continued drift into a new but as yet unconfigured world order. Russia and China look to be rising in influence. Europe, with severe but hardly fatal problems in real estate, looks to be holding its own. Fundamentally, if the U.S. is to maintain any control over world affairs, it must drastically revise its financial policy. This seems unlikely. In the final analysis, this year’s G-8 meeting appears to be yet another exercise in futility.