G-20 Summit Goals
Research for Online Investors

by John Dalt

6/24/10

The G-20 meeting starts Saturday in Toronto, Canada. The tug-of-war between the U.S. and Europe couldn’t be starker. Traditionalists would think the U.S. would be trying to pull Europe back from the brink of socialist spending plans, and Europe would be encouraging the U.S. to “prime the pump” with more government spending to goose the world economy. Traditionalists would be wrong, 100% wrong.

In a plot twist that befits the Twilight Zone of yesteryear, the Europeans are tightening their budgets and the U.S. is cajoling the Europeans to increase spending.  On June 18, President Obama called on other leaders in the G-20 to “learn from the consequential mistakes of the past when stimulus was too quickly withdrawn and resulted in renewed economic hardships and recession.”

Security at Toronto ready for Protesters

Jean-Claude Trichet, President of the European Central Bank (ECB) said that unless Europeans believe that governments can get control of their budgets, “then households are going to be frightened, they will not spend.  Companies will not prepare for the future.”

Mr. Trichet argues that ‘fiscal prudence is the best medicine for the European Economy.’ The New York Times covered the Economic and Monetary Affairs Committee meeting in Brussels on Monday.

Misch’s Global Economic Trend Analysis reports that Harvard University’s Professor Alberto Alesina made a presentation to the European Finance chiefs at their April meeting in Madrid.  In an interview, Economics Professor Alesina said, “There have been mountains of evidence in which cutting government spending has been associated with increases in growth, but people still don’t quite get it.”  This strategy in the past has also “resulted in significant bond and equity-market outperformance.” according to an April 14 report from Goldman Sachs.

According Goldman Sachs economists Kevin Daly and Ben Broadbent the key is cutting spending rather than raising taxes. ‘Lower spending means consumers and companies don’t fear higher taxes, so demand accelerates. A smaller public sector also helps reduce borrowing costs and makes economies more competitive as fewer government workers lighten labor expenses.’

What can happen at the G-20 summit? The theme of the summit is “Recovery and New Beginnings.” The focus is to be on the global economy in the aftermath of the financial crisis. China News defines major countries priorities as:

--Canada:  Reach agreement to reduce deficits by 50% in the next five years.

--United States:  Consolidate global economic recovery.  Overhaul financial policies, stronger financial regulation and supervision.

--China:  Push International Monetary Fund (IMF) to change their quota system to favor emerging markets and developing countries (China).

--European Union:  Coordinate exit strategies from stimulus.  Enact global financial tax.

--India:  No interest in taxing banks.

--South Africa:  Push for trade rules that favor emerging countries.

--Russia:  Establish a world environmental fund, and impose a global bank tax.

The disparate goals of the countries create a free-for-all atmosphere. Let the horse trading begin, but expect to lose. The idea of a global financial transaction tax (FTT) seems to have support from a wide swath of countries, especially in Europe, where the popular feeling is that the financial markets should pay for the credit crisis. The current proposal is for a 0.05% tax on EVERY financial transaction occurring across all asset classes. This rate would yield an estimated $690 billion per year, or 1.4% of world GDP.

This is probably too big a honey pot for the world’s politicians to walk away from without taking a dip. 97% of all trading volume in the world occurs in G-20 and European Union markets.  An FTT is also a easy first step to a world tax regimen that many "world improvers" and developing countries want to use to take money out of developed country's economies (you).

I can make a firm pledge, under my plan; no family making less than $250,000 a year will see any form of tax increase. Not your income tax, not your payroll tax, not your capital gains taxes, not any of your taxes.---Barack Obama

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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