On paper, the Group of 20 summit getting under way Thursday in Seoul, South Korea, is a chance for major countries to discuss the world's financial woes and try to come up with a joint plan to rebalance the global economy.
Beneath the surface, tensions are building, and the U.S. Federal Reserve's decision last week to flood the economy with more money through quantitative easing hasn't helped.
The differences are big enough that they won't be ironed out quickly, and the summit is unlikely to produce much beyond a kind of pro forma commitment from world leaders to work together, says Carsten Brzeski, senior economist at ING. "Will we really get a solution for this imbalance problem at the G-20 meeting? No, we won't. But we will get lip service and some verbal commitment that at least all of the big global players are aware of the problem," Brzeski says.
The sticking points stem from the reality that the economic recovery is basically proceeding on two separate tracks, says Eswar Prasad, professor of international trade policy at Cornell University.
In the United States and some other mature economies, unemployment remains stubbornly high and growth is anemic, despite repeated efforts by central banks and government officials to stimulate demand, Prasad says.
U.S. officials blame that weakness on efforts by other countries -- especially China -- to keep their currency rates artificially low. This has kept Chinese imports cheap, short-circuiting the kind of export-led growth that American officials see as the way out of the country's problems.
"Just as the United States must change, so too must those economies that have previously relied on exports to offset weaknesses in their own demand," President Obama wrote in a letter to G-20 leaders. What's needed, it noted, is a "rebalancing" (this year's economic buzzword) of trade flows and currency rates.
"When all nations do their part -- emerging no less than advanced, surplus no less than deficit -- we all benefit from higher growth," the letter read.
But to many other countries, American complaints about currency manipulation betray more than a little hypocrisy. In recent years, the U.S. has tried to stimulate domestic demand by flooding its economy with money. Last week, it stepped up its efforts through a massive program of bond-buying called quantitative easing.
China's leading rating agency has attacked the program, pointing to "serious defects in the United States economic development and management model" and even lowering its rating on U.S. debt.
Whatever its aims, many critics say quantitative easing will weaken the U.S. dollar against other currencies such as the euro, helping its own exporters and hurting those in other places. Central banker, heal thyself.
The Inflation Threat
At the same time, all that quantitative easing is stoking fears about inflation in such places as Brazil, Thailand and India. When dollars become so cheap, investors can and do borrow them and invest the money in red-hot emerging markets, Prasad says.
"If you have amounts in the order of $10 [billion] to $20 billion flooding into an economy like Thailand's, that sends the Thai stock market and Thai inflation rate surging," he says.
Thailand has been forced to impose capital controls to keep it from being overwhelmed by all that cheap money from abroad. Big countries like China and Brazil are less vulnerable to cheap money from abroad, but they, too, worry about inflation pressures, he says.
"There is a very strong sense that the U.S. could end up not doing very much good for itself and probably create some risks for itself, but more importantly create huge risks for the rest of the world," Prasad says.
"And there is a sense that the U.S. has blinkers on it about the effects of its policies on the rest of the world."