The telegraph reports that the G20 moves the world a step closer to a global currency.

(emphasis mine) [my comment]

The G20 moves the world a step closer to a global currency
The world is a step closer to a global currency, backed by a global central bank, running monetary policy for all humanity.
By Ambrose Evans-Pritchard
Last Updated: 03 Apr 2009

A single clause in Point 19 of the communiqué issued by the G20 leaders amounts to revolution in the global financial order.

"We have agreed to support a general SDR allocation which will inject $250bn (£170bn) into the world economy and increase global liquidity," it said. SDRs are Special Drawing Rights, a synthetic paper currency issued by the International Monetary Fund that has lain dormant for half a century.

In effect, the G20 leaders have activated the IMF's power to create money and begin global "quantitative easing". In doing so, they are putting a de facto world currency into play. It is outside the control of any sovereign body. Conspiracy theorists will love it.

[I will do a full entry explaining this "global quantitative easing" and SDRs later]

It has been a good summit for the IMF. Its fighting fund for crises is to be tripled overnight to $750bn. This is real money.

Dominique Strauss-Kahn, the managing director, said in February that the world was "already in Depression" and risked a slide into social disorder and military conflict unless political leaders resorted to massive stimulus.

He has not won everything he wanted. The spending plan was fudged. While Gordon Brown talked of $5 trillion in global stimulus by 2010, this is mostly made up of packages already under way.

But Mr Strauss-Kahn at least has resources fit for his own task. He will need them. The IMF is already bailing out Pakistan, Iceland, Latvia, Hungary, Ukraine, Belarus, Serbia, Bosnia and Romania. This week Mexico became the first G20 state to ask for help. It has secured a precautionary credit line of $47bn.

Gordon Brown said it took 15 years for the world to grasp the nettle after Great Crash in 1929. "This time I think people will agree that it has been different [Oh, it will be different all right, but not in a way you will like]," he said.

President Barack Obama was less dramatic. "I think we did OK," he said. Bretton Woods in 1944 was a simpler affair. "Just Roosevelt and Churchill sitting in a room with a brandy, that's an easy negotiation, but that's not the world we live in."

There will be $250bn in trade finance to kick-start shipping after lenders cut back on Letters of Credit after September's heart attack in the banking system. Global trade volumes fell at annual rate of 41pc from November to January, according to Holland's CPB institute — the steepest peacetime fall on record.

Euphoria swept emerging markets yesterday as the first reports of the IMF boost circulated. Investors now know that countries like Mexico can arrange a credit facility able to cope with major shocks — and do so on supportive terms, rather than the hair-shirt deflation policies of the old IMF. Fear is receding again.

The Russians had hoped their idea to develop SDRs as a full reserve currency to challenge the dollar would make its way on to the agenda, but at least they got a foot in the door.

There is now a world currency in waiting. In time, SDRs are likely evolve into a parking place for the foreign holdings of central banks, led by the People's Bank of China. Beijing's moves this week to offer $95bn in yuan currency swaps to developing economies show how fast China aims to break dollar dependence.

French President Nicolas Sarkozy said the summit had achieved more than he ever thought possible, and praised Gordon Brown for pursuing the collective interest as host rather than defending "Anglo-Saxon" interests. This has a double-edged ring, for it suggests that Mr Brown may have traded pockets of the British financial industry to satisfy Franco-German demands [good. Franco-German demands (more transparency and regulation of financial system) needed to be satisfied.]. The creation of a Financial Stability Board looks like the first step towards a global financial regulator. The devil is in the details. [EXACTLY]

Hedge funds deemed "systemically important" will come under draconian restraints. How this is enforced will determine whether Mayfair's hedge-fund industry — 80pc of all European funds are there — will continue to flourish.

[Mayfair's hedge-fund industry = London's TOTALLY UNREGULATED hedge fund industry.

London, even more than Wall Street, is the source of all evil in this crisis: SIVs, hedge fund industry, AIG's financial unit, London's secretive gold market, etc...]

It seems that hedge funds have been designated for ritual sacrifice [very positive development], even though [because] they played no more than a cameo [a central] role in the genesis of this crisis. It was not [only] they who took on extreme debt leverage: it was [also] the banks — up to 30 times [100 times through off balance sheet vehicles (SIVs, VIEs, etc...)] in the US and nearer 60 times for some in Europe that used off-books "conduits" to increase their bets. The market process itself is sorting this out in any case — brutally — forcing banks to wind down their leverage. The problem right now is that this is happening too fast.

But to the extent that this G20 accord makes it impossible for the "shadow banking" to resurrect itself in the next inevitable cycle of risk appetite, it may prevent another disaster of this kind. [The "shadow banking" system is a root cause of this crisis. Hedge funds, banks, insurers (ie: AIG), credit rating agencies, etc all played a role in creating this mess.]

The key phrase is "new rules aimed at avoiding excessive leverage and forcing banks to put more money aside during good times." This is more or less what the authorities agreed after the Depression. Complacency chipped away at the rules as the decades passed. It is the human condition, and we can't change that. [New forms of media (HD TV, radio, internet) will record the current crisis in ways not possible during the great depression. This should help keep today's events in our collective memory]

The telegraph gives the point by point analysis of G20 communiqué.

G20 communiqué: Point by point analysis
Gordon Brown hailed the G20 agreement as an "historic" moment which would help lift the world out of recession earlier than predicted.
By Edmund Conway and Robert Winnett
Last Updated: 03 Apr 2009

Hundreds of billions of dollars in extra money was pledged along with a new clampdown on the worst excesses of the financial system.

Months of tense diplomatic negotiations resulted in the nine page communiqué issued on Thursday evening. These are the main points of the agreement:

IMF Resources

The centerpiece of the announcement was a dramatic increase in the funding available to the International Monetary Fund (IMF).

The IMF currently has about $250 billion at its disposal to lend to countries facing financial difficulty. Several Eastern European countries have already sought assistance.

Under the G20 agreement, funding for the IMF will be increased by $500 billion to $750 billion. Japan agreed to provide $100 billion of the extra funding, the European Union $100 billion and China about $40 billion. [Where is the rest coming from? Is the amounts already pledged contingent on others lending the rest of the 500 billion increase (260 billion)?]

The IMF is also to begin selling off some of its gold reserves to establish a new $50 billion fund to help the developing world. [More on IMF gold sale in next entry (preview: not really significant)]

Emerging economies such as China are also expected to be given a greater say in the running of the IMF as part of the package.

Bankers' pay

An unprecedented crackdown on pay and bonuses for bankers was agreed by world leaders.

As disclosed in yesterday's Daily Telegraph, a new international set of rules will prohibit banks from paying traders and executives multi-million pound cash bonuses if they are making risky decisions [Will these rules actually happen? And will they work? We will see]. Regulators will assess how much risk traders are taking and those deemed to be making more risky decisions will only be paid in shares which cannot be sold for several years. [The compensation of bank executives should be tied to the long term debt of their financial institution, not the stock price]

Global "quantitative easing"

At the behest of the world leaders, the IMF will increase the amount each country has in so-called Special Drawing Rights (SDR) by $250bn.

This is effectively global quantitative easing — comparable to the unprecedented measures the Bank of England carried out last month when it committed to pumping £75bn into the British economy. This is a form of printing money. [Buy gold]

Under the IMF scheme, each country has an allocation of a shadow IMF currency — known as SDRs. This currency can be converted into useable currencies such as dollars, euros or sterling. The amount of SDRs was dramatically increased by more than ten-fold yesterday. The scheme is best regarded as a safety valve for struggling economies, and rich countries are likely to donate some of their SDR allocation to those most in need.

[Again, I will do a full entry explaining SDRs later]

Fiscal Stimulus

This was supposed to be the big centre-piece of the G20 summit - a global agreement on how much countries around the world would spend on measures to support their economies and fight unemployment.

However, the French and German governments ruled out an explicit commitment. All leaders could agree to announce was how much had already been pledged - $5 trillion. The Prime Minister hailed a statement that Governments would not rule out further bail-outs in future if required.

Offshore tax havens

Countries who refuse to pass information to foreign tax authorities to help catch potential tax evaders will face sanctions in future. A preliminary list of such offshore tax havens is to be published.

The G20 communique proclaimed: "The era of banking secrecy is over". Gordon Brown said that it was "the beginning of the end" for widespread tax avoidance. ["the end" of "widespread tax avoidance", huh? How much are you willing to bet on that?]

However, it is yet to be seen what sanctions will be deployed against the tax havens despite lobbying from the French Government. [This is why I don't get excited about vague international commitments]

Toxic Assets

Most economists agree that until the world's leading [bankrupt] nations cleanse the balance sheets of their stricken banks the credit crunch will persist and there will be no return to normal lending conditions. [This is idiotic because it makes no sense. The US/UK have no means to "cleanse the balance s heets of their stricken banks" except the destruction of their currencies. As should be obvious, currency collapses do will not return world "to normal lending conditions"]

The G20 communique recognises this issue and pledges that each country will dispose of the assets, either by setting up a so-called bad bank or by insuring the assets against default (as the UK has done [a bankrupt nations insures its banking system's toxic assets. This is sure to work out well (sarcasm)]). The commitment is slightly stronger than in previous international statements. But it does not go as far as many economists had hoped by pledging to set up new, healthy "good banks" which could provide fresh lending for households in the future.

[Financial reality: no about of financial wizardry can make toxic debt disappear without someone (probably taxpayer) taking a loss]

Protectionism

The G20 member countries committed to a 12-month freeze on introducing any new trade barriers. In other words, they will not increase tariffs or quotas on goods imported from overseas. If followed to the letter, this would be a significant move. It was an increase in protectionism during the 1930s that lengthened and deepened the Great Depression, and ultimately fed the forces that caused the Second World War.

However, there is skepticism that this commitment will be met. A similar promise was made last November; since then the World Bank has found that 17 member countries raised trade barriers. [Again, this is why I don't get excited about vague international commitments]

Beefed up international financial monitor

The summit agreed to turn the existing Financial Stability Forum (an international group of regulators) into a more pro-active [toothless] global banking watchdog.

It will be renamed the Financial Stability Board and its membership will be broadened to developing nations including China, Brazil and India. Its job will be to monitor whether banks and financial houses are taking excessive risks, and to tell their national regulators to police them more stringently. However, critically, the new FSB will lack explicit powers to clamp down on companies which overextend themselves. There remains a major question mark over how much difference a relatively toothless regulator will make.

["relatively toothless regulator" is not something I can get excited about]

Trade finance

One of the major problems facing the global economy is the sharp drop in trade across the world — the first reduction in trading in a generation.

Exporters in the developing world have been unable to obtain credit in the wake of the global financial crisis.

Global leaders agreed to provide $250 billion in new trade credit guarantees. The guarantees — to be offered by the World Bank and other international institutions — should allow exporters to obtain credit once again. Mr Brown heavily pushed the scheme during his recent trip to South America.

[I HATE guarantees. They make it easy for institutions to take ENORMOUS RISKS, and they cause MASSIVE SYSTEMATIC RISKS. Furthermore, those receiving guarantees are given a FALSE sense of security, which makes them take more risks. Guarantees were instrumental in wrecking our financial system:

50+ trillion credit default swap market
bond insurers
FDIC guarantee (the government has no way of making good on its guarantees without destroying the dollar)
"government sponsored" status of Freddie and Fannie
AIG's financial unit
Etc...

GUARANTEES MAKE NO SENSE WHEN THOSE MAKING THEM DO NOT HAVE THE RESOURSES NECESSARY TO MAKE GOOD ON THEM.

I will do an entry on the evils of guarantees in the futures]

My reaction: Comments in the articles above.