The G-20 conference called to discuss the “New World Order” over the weekend wrapped up in Washington.  Of course, no New World Order emerged, but the shift in the global economic decision-making had begun.  The will be more regulation of the financial markets and there will be more participants at the table in the years to come.

The G-20 Conference’ communiqué blamed the causes of the current crisis on “weak underwriting standards, unsound risk-management practices, increasingly complex and opaque financial products and consequent excessive leverage.” Participants in the conference confidentially stated that nobody pointed at the United States as the culprit, but that the U.S. officials did acknowledge that the U.S. subprime mortgage industry had engaged in practices that proved dangerous to the whole of the global economy.

The communiqué also said that, over time, the IMF and other global institutions “must be comprehensively reformed so that they can more adequately reflect changing economic weights in the world economy,“ giving a nod to the developing countries’ demand for expanded participation in the elite financial institutions.

Brazilian President Luiz Inácio Lula da Silva expressed the views of the emerging economies when he stated that G-8: the United States, Britain, France, Germany, Japan, Canada, Italy, plus Russia, “doesn’t have anymore reason to exist” on its own.

The Washington Post published an interesting commentary on the G-20 Summit by Harvard’s Niall Ferguson, entitled “Team Chimerica.”  He makes the point that there were twin engines that drove the world to the current crisis: American and China.  He rightfully states that America’s debt bonanza has been made possible by China, as a matter of economic development strategy.  “More than anything else, it has been China’s strategy of dollar reserve accumulation that has financed America’s debt habit.” This partnership between the big saver and the big spender, or Chimerica, is the key to both understanding the causes of the crisis and to reversing its course. The solution Ferguson advocated for is an agreement between U.S. and China on a gradual reduction of the Chimerican imbalance via increased U.S. exports and increased Chinese imports. 

This crisis should make the Chinese government understand that the party is over.  China can no longer pushing exports out to the rest of the world, as if the world had an infinite capacity to buy.  As we have found out, such infinite capacity does not exist, and China should restructure its economy accordingly.

Japan slid into recession, the government data released today confirmed.  Japan is the world’s second largest economy and most experts were predicting that the country will be able to avert recession with modicum growth.  Asian stocks fell.  And so did the U.S. stocks, on more indicators that the U.S. may soon follow Japan’s fate, even though officially we are not in a recession, yet.  Manufacturing in New York contracted in November as shown by the fall of the New York Fed’s index to minus 25.4, the lowest since records began in 2001.  Citigroup Inc. announced a plan to cut 50,000 jobs.

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