The President, however, justified the stimulus saying that the Fed mandate as well as his, was “to grow our economy. And that is not just good for the United States but for the world as a whole”. The United States had gone through “an extraordinary economic trauma, which has resulted in some extraordinary measures”, he said. US Fed Chairman Mr Ben Bernanke has stoutly defended the Fed move as badly needed to avoid deflation and revive growth and jobs.

But at the 5th G-20 Summit in Seoul on November 11-12, leaders of Germany, Japan, China, Brazil and other Asian countries will voice their concerns over the impact of Fed action on the rest of the world in terms of exchange rates and excessive capital flows and related economic consequences. Finance Minister Mr Pranab Mukherjee is of the view that there should not be “unilateral” approach in dealing with global problems.

While the Fed action may be strictly a growth stimulant, the “quantitative easing” by purchase of 600 billion dollars of US Government bonds during the next eight months while driving down long-term interest rates to encourage investments for growth, will also push down the value of dollar and lead to flood of capital to emerging market countries having higher interest rates.

Such flows impact on exchange rates and may hurt, in particular, exporting nations like Germany and Japan, which has already intervened once and is ready to do again as also emerging economies in some form or the other. Both Germany and China have denounced the Fed decision as one which would undermine the credibility of US financial policy and run counter to the G-20 consensus approach. The other risks cited are trade protectionism and a further rise in prices of oil and other international commodities.

The Federal Reserve decision on expanding its balance sheet announced by Chairman Mr Ben Bernanke, on November 3 after months of monitoring an uncertain pace of growth without any sign of unemployment level lowering. On the other hand, Fed seemed to be having concern over the low level of prices below its benchmark and a possible deflation. Mr Bernanke has pointed out that the Fed has a dual mandate - to promote a high level of employment and low, stable inflation.

The unemployment rate remains stubborn at 9.6 per cent while inflation has long remained subdued below 2 per cent, the rate Fed regards as a target consistent with healthy economic growth. As such there is considerable spare capacity with scope for monetary policy to support gains in employment without risking overheating, Mr Bernanke said.

At the same time, Fed is moving cautiously with a monthly purchase average of 75 billion dollars in government bonds and a regular review to see whether it is working as intended. The Fed Chairman dismisses as 'overstated” concerns expressed about excessive liquidity and inflationary pressures as a result of Fed action. The Fed has all the tools “to unwind policy at the appropriate time”

Mr Bernanke has rejected criticisms abroad and maintains that its actions should not be seen as other than monetary policy measure aimed at giving a boost to the weak US recovery. A strong US economy is critical not just for Americans but for global economy, he said. US policy-makers are fully aware of the importance of dollar in the global economy and “the best fundamentals for dollar will come when the American economy is growing strongly”.

President Obama said talking to reporters in New Delhi that the Seoul Summit would talk about a host of issues including balanced and sustainable growth. But part of balanced growth is also 'a recognition that they cannot continue to sustain a situation in which some countries maintain massive surpluses and others massive deficits and there is never the kind of adjustment with respect to currency that would lead to more balanced growth pattern', the added apparently keeping countries like China in view.

Prime Minister Dr Manmohan Singh said at the joint press conference that India also is keen to see that Seoul Summit responds to the challenge before global statesmanship to strike “a new balance” between deficit and surplus countries. Also, the objective of balanced growth must have a focus on development, especially for poorer countries facing investment needs in infrastructure, energy and agriculture.

The Seoul Summit will have to overcome the sharp policy differences that have surfaced in recent weeks and formulate strategies which would preserve the unique strength of the Group, accounting for over 85 per cent of global output, and its role in advancing toward a new economic order for the 21st century. Any failure to find a credible way of ensuring stability in exchange rates across nations would imperil the G-20 Framework for Strong, Sustainable and Balanced Growth” which would help to minimize the huge global imbalances..

Already, there were signs of weakening of G-20 solidarity as countries followed different routes in regard to exit from fiscal and monetary support measures when global economic recovery had not stabilized. The Seoul Summit was therefore expected to give a new impetus to the solidarity of the most powerful global grouping and securing a stronger revival of the world economy. It would review progress on the key objective of growth balancing with initial assessments coming from IMF.

The Leaders are likely to endorse the financial sector regulations and the new Basel standards for the banking system in regard to both capital and liquidity requirements, as recommended by the Financial Stability Board. It would commend the finalisation of IMF Governance reforms to give greater voice and representation for emerging economies and other developing countries. G-20 will have reports from international organizations on the trade, investment and other issues.

In a joint report on Investment, OECD-UNCTAD have urged G-20 leaders to remain vigilant against tensions over current account imbalances which could detract from investor confidence and dampen investment. Countries have also begun adopting policies (capital controls and financial curbs) aimed at “buffering their economies from volatility of foreign exchange markets and capital flows induced by these imbalances”. All such actions could slow investment or generate a new wave of protectionism. (IPA Service)