The White House on Friday released a letter that President Barack Obama sent to his fellow Group of 20 leaders. Mr. Obama's priorities: strengthening the recovery, restoring public finances "over the medium term," and nailing down new financial regulations. Oh, and a flexible exchange rate in China.
"The signals that flexible exchange rates send are necessary to support a strong and balanced global economy," he wrote in the letter, according to Reuters.
Mr. Obama's missive reveals the fault lines - at least the public ones - for next weekend's summit.
While most everyone appears roughly on the same page when it comes to financial regulation, there is debate about whether the global economy is ready for co-ordinated austerity programs and whether the Chinese government is doing its part to allow a "rotation" of demand to China and other fast-growing Asian countries from anxious and debt-burdened U.S. consumers.
China is pushing back on the currency question, warning G20 countries against piling on when they get to Toronto. On Thursday, an unnamed official and spokesman delivered that message. Friday, it was President Hu Jintao's top G20 negotiator and other senior officials.
Mr. Obama is fighting an increasingly lonely fight on the need to keep economic stimulus in the system. As many European nations introduce budget cuts to keep the bond vultures at bay, former Federal Reserve Chairman Alan Greenspan wrote an opinion piece in The Wall Street Journal that argues the U.S. could hit a similar debt wall sooner than many think. (If you lack a key to get past the WSJ's pay wall, Bloomberg News has a summary of Mr. Greenspan's warning. Earlier this week, Andrew Coyne of Maclean's channeled the told-you-so attitude of the Chicago School disciples who are feeling a little better about their economic philosophy these days than they were six months ago.
Neither of these issues, the yuan or stimulus, will be easily sorted.
Of the two, the China-currency debate is the more clear cut, but only because there is little dispute over the economics. Even the Chinese government says it will have to allow the yuan to appreciate eventually in order to stave off inflation. But the timing of a move is so difficult to predict because, as Jose Vinals, the director of the International Monetary Fund's monetary and capital markets department, said at a presentation hosted by the Carnegie Endowment for International Peace in Washington on Thursday, the yuan issue is not "only in the economic domain, but the political domain."
In many ways, the stimulus vs. austerity debate is the reverse: the politics are clearer; the economics less so. Events in Europe, where even French President Nicolas Sarkozy had the courage to announce an increase to the country's retirement age, show that anxiety over debate has created the political conditions to slash spending. But is this really the time for that? The Baltic Dry Index, an important measure of international trade, has been dropping for three weeks. Mr. Coyne and like-minded critics suggest that the European debt crisis shows the G20's fiscal stimulus program was a mistake. Not really. The prospect of demand - government generated or not - calmed financial markets. Then, as that money flowed into the global economy, real companies got back to work and rehired some of the people they fired during the financial crisis. Europe's debt woes are actually a condemnation of lax fiscal policies in the decade before the financial crisis. The lesson, then, is keeping your finances under control in good times so you can afford to take on some debt when things go bad. The question Mr. Obama is asking is whether now is the moment to correct those mistakes? The Americans want to err on the side of caution. On this, they have at least one supporter: China.
"The global economy is in the process of recovering, but still faces uncertainties, especially the European debt crisis," China's vice finance minister, Zhu Guangyao, said Friday, according to Reuters.