Betting on emerging markets? You Might Want to Read the Text of the G20 on Exchange Rates

It's a bit like the United Nations of industrialized economies and about as effective when it comes to preventing trade wars, but the G20 is not just photo ops for world leaders.



Or an opportunity for police forces to test their latest crowd control strategies.



Hidden between platitudes in the November 11-12 communiqué were a couple of paragraphs that should make investors betting on developing nations and their currencies lose sleep at night. Read carefully.

"Advanced economies, including those with reserve currencies…will help mitigate the risk of excessive volatility in capital flows facing some emerging market economies.”

That amounts to the Federal Reserve pretending to agree to join in helping prevent developing nation currencies from rising against the dollar. That’s basically the opposite of what it's been doing with its intentionally pro-inflation cash fire-sale known as quantitative easing or QE2. And therefore, basically, a lie. But the potentially destructive truth comes in the next paragraph.

"Nonetheless, in circumstances where countries are facing undue burden of adjustment, policy responses in emerging market economies with adequate reserves and increasingly overvalued flexible exchange rates may also include carefully designed macro-prudential measures.”

That means the most important central bankers in the world have just given the go-ahead for “emerging” economies from South Korea to Brazil, to penalize foreign investors to discourage bubbles. Now, without fear of reproach they can try to depress their currencies by "macro-prudentially" taxing foreign investments in local bonds and potentially even stocks.



For an investor or currency trader betting on Brazil this begs the question: Why load up on Brazilian bonds and currency if Brazilian investments may end up facing a punitive tax? You just might want to get-out now while the party’s still fun.



So while, this month's Seoul G20 meeting may have lacked the extreme anarchic panache of the London and Toronto get-togethers (not that it was a total disappointment), some policy was actually being decided there.



And despite the fact that it's easy to make fun of the gathering’s pretenses of co-operation between rivals and frequent calls to restudy problems that they’ve just finished restudying, listening to central bankers talking in diplomatic code is not entirely without reward.



If you listen carefully, you may hear the first real tremors of the tectonic shift in the world's balance of economic power. The sobering fact is that the US did not get much of what it wanted from the world’s central bankers. There was no substantial discussion of letting China's currency rise, or trade agreement with South Korea, let alone real policy commitments from countries that contribute to the massive US trade deficit.

Rather the US was on the defensive over its own policies. Another sign that post 2008 the rest of the world is no longer quite so interested in America's economic advice.