The Group of 20 decided early this morning to give the IMF new powers and to rebalance the voting rights among its members. Europe will give up two of its six seats while the BRIC countries get more voting power.
Timothy Geithner, US Treasury Secretary, has lobbied hard and furious to change the voting balance within the International Monetary Fund and has convinced Europe to give up two seats in favor of emerging economies.
Mr. Geithner’s goal has been to find a way for China to allow its yuan-renminbi to strengthen versus the dollar to offset the trade imbalance between the two largest world economies.
The second goal was to find a methodology to adjust the existing imbalance between producing and exporting economies (the east) versus the consuming countries (the west).
During the late night and early morning marathon meeting between the G20 members, the US found a way to achieve those goals and the common denominator was a new role for the IMF.
What does this really mean for the immediate and distant future?
The IMF has been granted the power of overseeing international currency exchange rates and global trade imbalances. The new commission will be approved by the IMF early November and is expected to be fully operational mid 2011.
The mandate for the IMF will be to instruct members to adjust the value of its legacy currency proportionately to its input or output in order to create a balance between currency markets and trade markets within the global economy.
Due to the new role of the IMF, which is unprecedented and the largest structural change made since its 1945 inception, the global economic picture will no longer be a reflection of continental economic activity but rather an artificial balance of import/export activity or production/consumption models.
The immediate impact will be that large exporters will be mandated to strengthen their currency to rebalance their trade balance sheet in favor of importing countries who will devalue its currencies to strike the imposed balance.
The future impact paints a slightly different picture when one looks at the positive impact on China and the US may end up regretting their decision.
The new rules will entice China to turn its economic model around even faster than they had in mind. The Chinese will transform its export driven economy, currently at 80%, into a sustainable model of 50% self-consumption and 50% export activity.
That turnaround will get China faster to its ultimate destiny: to become the world’s largest economic engine.
This will also result in the yuan-renminbi becoming very convertible as a trading currency in the global environment and will lead to the Chinese currency also becoming a preferred reserve currency.
In the short-term, Mr. Geithner may have gotten his wish to rectify the trade and currency imbalance, but the US, Europe and Japan have all shown their cards on the table.
Note that the Chinese delegation did not object to the IMF taking on the role of new trade and currency watchdog. China now has an open playing field and more seats on the IMF board.
Written by Nick Doms © 2010, all rights reserved.
Timothy Geithner, US Treasury Secretary, has lobbied hard and furious to change the voting balance within the International Monetary Fund and has convinced Europe to give up two seats in favor of emerging economies.
Mr. Geithner’s goal has been to find a way for China to allow its yuan-renminbi to strengthen versus the dollar to offset the trade imbalance between the two largest world economies.
The second goal was to find a methodology to adjust the existing imbalance between producing and exporting economies (the east) versus the consuming countries (the west).
During the late night and early morning marathon meeting between the G20 members, the US found a way to achieve those goals and the common denominator was a new role for the IMF.
What does this really mean for the immediate and distant future?
The IMF has been granted the power of overseeing international currency exchange rates and global trade imbalances. The new commission will be approved by the IMF early November and is expected to be fully operational mid 2011.
The mandate for the IMF will be to instruct members to adjust the value of its legacy currency proportionately to its input or output in order to create a balance between currency markets and trade markets within the global economy.
Due to the new role of the IMF, which is unprecedented and the largest structural change made since its 1945 inception, the global economic picture will no longer be a reflection of continental economic activity but rather an artificial balance of import/export activity or production/consumption models.
The immediate impact will be that large exporters will be mandated to strengthen their currency to rebalance their trade balance sheet in favor of importing countries who will devalue its currencies to strike the imposed balance.
The future impact paints a slightly different picture when one looks at the positive impact on China and the US may end up regretting their decision.
The new rules will entice China to turn its economic model around even faster than they had in mind. The Chinese will transform its export driven economy, currently at 80%, into a sustainable model of 50% self-consumption and 50% export activity.
That turnaround will get China faster to its ultimate destiny: to become the world’s largest economic engine.
This will also result in the yuan-renminbi becoming very convertible as a trading currency in the global environment and will lead to the Chinese currency also becoming a preferred reserve currency.
In the short-term, Mr. Geithner may have gotten his wish to rectify the trade and currency imbalance, but the US, Europe and Japan have all shown their cards on the table.
Note that the Chinese delegation did not object to the IMF taking on the role of new trade and currency watchdog. China now has an open playing field and more seats on the IMF board.
Written by Nick Doms © 2010, all rights reserved.