How the G20 Meeting Will Hurt Your Wallet

Last Updated Sep 24, 2009 10:57 AM EDT

Some people believe that the summit meeting of G20 countries that opens today in Pittsburgh is nothing but a boring gabfest with leaders making more empty promises they have no intention to keep. They would be wrong. The ideas being discussed in Pittsburgh have the potential to hit you in the pocketbook in ways you never imagined. Hard.

Here's a partial rundown on some of the ways Americans will likely be affected:

Global imbalances. When President Obama talks about reducing global imbalances during the negotiations, he means that exporting countries like China and Germany should boost domestic demand and reduce dependence on exports. For the United States, the opposite is true: the country should cut the current account deficit (imports of goods and financial products over exports) now at about 3 percent of GDP and boost exports of its own.

The easiest way for the United States to accomplish this goal is to allow the dollar to fall against other currencies. A cheaper dollar means imports are more expensive and would be discouraged, and exports from U.S. manufactures would be relatively cheaper and more attractive. The dollar is down nearly 6 per cent this year, and could fall dramatically after the Pittsburgh meeting.

That means higher prices for imports like Nike shoes and Sony flat panel televisions. Perhaps more importantly, since the dollar and commodities usually trade in opposite directions, a fall in the dollar will mean sharply higher gasoline prices at the pump.

The recession has accomplished what no government policy has been able to do: lowering household debt. According to the Wall Street Journal, household debt declined late last year for the first time since 1952. In addition, the household savings rate, which had fallen below zero, is expected to rebound 3 to 5 percent this year.

By encouraging an increase in household savings, which is generally a positive goal, the end result will be a U.S. economy which is slower and creates fewer jobs than in the past. The economy, which depends on the consumer for 70 per cent of activity, will be slowing down until U.S. exports take up the slack, which could take years.

Banker pay. The leaders in Pittsburgh are going to agree on measures to restrict banker's bonuses. If you think this does not affect you because you are not a banker, think again.

The movement to restrict banker's bonuses began with the federal government t trying to rein in pay at just seven financial firms that had received government bailouts. But you can be sure that an agreement at Pittsburgh on limiting bankers' bonuses will be incorporated into pay packages at many U.S. firms, not just banks.

But taking the international initiative to limit pay as its guide, the Federal Reserve has announced that it will be instituting new pay rules at 5,000 financial institutions it regulates. More importantly, the new regulations would apply not just to C-suite executives, but also to loan officers, traders and all other employees. The idea would be to limit compensation packages that lead to too much risk taking.

Here's where it gets interesting. Fearing efforts in Congress may expand from financial services firms to all corporate pay, the non-profit Conference Board announced a series of measures that are designed to control risk taking at all firms, including compensation packages at non-financial institutions. This will affect not only top management, but will eventually percolate though the ranks and impact middle managers as well.

What can you expect? The guidelines calls on firms to stop issuing multi-year employment agreements that have large severance payments; end generous "golden parachutes" severance agreements; eliminate tax "gross ups" of parachute payments; end executive benefits that are not available to other managers; and stop stock option repricing that is not approved by shareholders.

Think this will never happen? The Conference Board says the terms have already been agreed at AT&T, Hewlett Packard and Tyco International and are being considered at other firms.

Bank capital. The Obama administration is urging banks around the world to raise their capital ratios, or the cushion against future losses. While this may sound esoteric, bankers are already complaining that if they must raise more capital, they will have less money to lend to customers.
So adoption of these new rules, while possibly protecting banks against another crisis like the one that happened last year, will probably mean commercial and personal loans are harder to get and lending limits on credit cards are reduced.

While the noise in Pittsburgh may seem like a distraction to many TV viewers, the results of the G20 meeting will have greater impact on your lives than you ever imagined. It will be well worth watching.