The President Travels to South Korea: The Fallout Continues

Morris Segall      currency devaluation, Fed monetary stimulus, inflation, protectionist measures, trade wars, weak capital markets, weak President, weak U.S. Dollar

President Obama went to Seoul, South Korea last week to attend the G-20 economic summit in the hopes of getting international cooperation on the low valuation of the Chinese currency and to sign a landmark trade agreement with South Korea that was supposed to open South Korea’s markets to increased American exports. The President failed in both initiatives and found himself the object of increasing foreign ire at the recent Fed monetary stimulus. This trip was supposed to be a high profile offset to the political drubbing the President suffered the week before. Instead the trip was an extension of the election debacle and added a new element of international rejection of American policy objectives and leadership. 

In our blog article, “The Fed Adds More Stimulus”, November 3, 2010, we commented on the negative effect the Fed’s stimulus would have on the value of the Dollar on international currency markets. This turned out to be a major confrontational issue with our trading partners in Seoul and clearly caught the President and his advisers off guard with its intensity and raising the possibility of a new round of trade protectionist measures and international currency devaluations. These threats and new sovereign debt concerns in Ireland caused stock and bond markets to decline around the world last week. While the leaders of the G-20 nations vowed to work to avoid such destructive actions, they were notably vague on the specific measures they would implement to accomplish these objectives. This lack of specificity led to the capital market nervousness and declines.

The failures of the President in Seoul and the broad and sharp criticism of American monetary and economic policies signify the shift in economic power from the mature, industrialized nations, led by the U.S., to the emerging economies led by China, India and Brazil. This power shift has been accentuated by the recessions in the U.S., Europe and Japan which have left these countries in a weakened financial status versus the fast growing Asian and Latin American economies. We should not underestimate the negative impact the Fed’s stimulus program is having on our own capital markets and our financial relations with the rest of the world. Since announcing its bond purchase program on November 3rd, the bond market has plummeted as fears of inflation and rising interest rates in the future overshadowed the benefits of current bond purchases. In addition, the spectre of international retaliation to the Fed actions via protectionist measures and competitive currency devaluations is also unsettling world capital markets. The Fed action is very unpopular abroad and has tarnished the reputation and esteem of the Fed and Fed Chairman Ben Bernanke. This needs to be defused and we expect the Fed to “step back” from the stimulus program at the first opportunity to do so. A stronger than expected reading of economic growth in the fourth quarter and an increase in wholesale and retail inflation numbers in the fourth quarter and first half of next year could be the excuse the Fed needs to “defer” this program.

As for the President, he is more wounded than before he traveled to Asia. He has been rebuffed bilaterally and collectively by nations that are our allies and trading partners. The President looks weak and may be considered by the rest of the world as increasingly irrelevant in view of the political setback at home and the continued weakness of our economy. We have written previously of the perils to American foreign policy when a U.S. president is deemed irrelevant on the international stage. Such a perception in the world of President Obama will have far reaching consequences in other important foreign policy initiatives such as disarming Iran and fighting international terrorism in Afghanistan and Pakistan. The remaining two years of the Obama presidency look to be difficult ones for the U.S. both domestically and internationally.

Morris R. Segall