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ETF Periscope: Was That a Seismic Shift In the Global Economy We Just Felt?

Posted on the 12 December 2011 by Phil's Stock World @philstockworld

Courtesy of Walter Gault, Communications Editor, Sabrient

Was That a Seismic Shift In the Global Economy We Just Felt?

“As a novelist, I tell stories and people give me money. Then financial planners tell me stories and I give them money.”  — Martin Cruz Smith

Beneath the daily noise of the continuing saga know as the European Union sovereign debt crisis, there is a strong underlying tremor going on, one that might eventually shake out as a major shift in the alignment of global financial power.

Aside from the obvious power struggle that seems to be playing out on pretty much a daily basis between elements represented by Germany and France, another drama is currently being played out around the International Monetary Fund’s (IMF) role in helping the EU extricate itself from what appears to be a problem without any viable long-term solution.

One of the proposals to emerge from last week’s final EU summit meeting of the year was that the ECB would lend up to $268 billion dollars to the IMF for the purpose of helping it meet a potential increase in loan demands from Italy, Spain, and other euro-zone members.

And if that concept seems to be a reasonably good example of pretzel logic, that’s because it probably is.

What the loan seeks to accomplish is to provide the recognized need for additional funds by the PIIGS (Portugal, Ireland, Italy, Greece and Spain) without violating some of the European Central Bank (ECB) rules that comprise its charter, which looks at direct lending to individual governments as a big no-no.

A work-around solution, then, is lending the money to the IMF, which can, according to its charter, make “crisis loans” to any of its members. Which, of course, includes the euro-zone member states.

If anyone needs a primer as to what is actually going on, it may require viewing of a Marx Brothers movie.

OK, so where does the seismic shift in power take place?

It has to do with the IMF and the influence it has on a global basis.

Up until now, it would be safe to say that the United States has been the premier power player among the IMF members. However, what is significant is that the U.S. will not be participating in this particular loan to the IMF.

In fact, it may be unlikely that the U.S. will be doling out any capital to the IMF anytime soon. The degree of resistance by Congress to providing financial assistance to the EU is huge, with over 25 Republican Senators submitting a bill last week that would effectively stymie any attempt to use U.S. taxpayer dollars to bail out the euro-zone.

While in itself it might seem reasonable for the U.S., with its own lethargic economy, to pass up an opportunity to contribute to a backstop against possible EU contagion, there are consequences that could result down the road that would weaken U.S. influence among some of the emerging nations.

With the U.S. stepping back from its role of leading contributor to the IMF, and, therefore, forfeiting some of its influence on the world stage, it is providing  opportunity to some of the other nations to gain some influence. China comes to mind, and perhaps even Russia, though the current government might be preoccupied with a new wave of unrest.

Still, it is telling that the U.S. is effectively and willingly relinquishing a degree of power, no matter how small. It just might be a sign of the times, and an indication of where the global economy might be heading.

However, it may come as somewhat of a surprise to some that a new paradigm might have some or all of the BRICS (Brazil, Russia, India and China) emerging as the new wave of power players this soon into the game.

ETF Periscope

Full disclosure:  The author does not personally hold any of the ETFs mentioned in this week’s “What the Periscope Sees.”

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