By Steven K. Beckner

SEOUL, South Korea (MNI) – President Barack Obama described
deflation as “a huge danger” for the United States Friday and said the
Federal Reserve’s recent decision to resume quantitative easing was not
designed to weaken the U.S. dollar, but rather to “grow the economy.”

Obama, at a press conference following the Group of 20 Summit, also
renewed his pressure on China to allow its “undervalued” currency to
rise and said his administration will be watching to see that it does.

Obama said the G-20 agreement to use “indicative guidelines” to
assess “persistently large imbalances” of trade provides “no
enforcement mechanism” but will provide a “mechanism” for applying “peer
pressure” on countries like China that run large trade surpluses.

Obama said he heard little criticism from other G-20 leaders of the
Fed’s decision to buy $600 billion more in Treasury securities. Their
main concern was about what the U.S. is doing to increase economic
growth and reduce unemployment, he said.

The Fed has been harshly criticized by a number of G-20 finance
ministers recently. There have been charges that the Fed was
perpetrating a “competetive devaluation” and that its creation of
hundreds of billions of new dollars risked causing disruptive “hot
money” flows.

Asked about the Fed decision and its reception at the Summit, Obama
said most of the criticism has been “in the press,” not in official
circles.

He said he heard “a couple of veiled references” to how U.S.
monetary policy will affect other countries, but said “there was not
a lot of discussion” about the Fed decision.

Obama said there was more concern about whether the U.S. economy is
“growing fast enough.”

“They want to see us grow” and reduce joblessness, he said, and so
other G-20 leaders were interested in “additional strategies” that the
U.S. might employ to achieve an economic “take-off.”

As for the Fed’s QE2 program, “when I am asked about it, my simple
point is to say that from everything I can see this decision was not one
designed to have an impact on the currency,” Obama said. “It wsas
designed to grow the economy.”

“We have had a very low inflation,” he went on, then added, “a huge
danger in the U.S. is deflation.”

Obama said “we have to be mindful” of the risk of deflation, saying
it “wouldn’t be good for the U.S. or for the rest of the world.”

That statement conflicts somewhat with what Fed Chairman Ben
Bernanke and many of his colleauges have said. They have expressed
concern about excessive disinflation but have generally downplayed the
odds of outright deflation.

Obama echoed other G-20 leaders in hailing the G-20’s latest effort
to curb trade imbalances.

In their communique, they agreed to “strengthen multilateral
cooperation to promote external sustainability and pursue the full range
of policies conducive to reducing excessive imbalances and maintaining
current account imbalances at sustainable levels.”

“Persistently large imbalances, assessed against indicative
guidelines to be agreed by our Finance Ministers and Central Bank
Governors, warrant an assessment of their nature and the root causes of
impediments to adjustment as part of the MAP, recognizing the need to
take into account national or regional circumstances, including large
commodity producers,” the communique continued.

“These indicative guidelines composed of a range of indicators
would serve as a mechanism to facilitate timely identification of large
imbalances that require preventive and corrective actions to be taken,”
it went on.

“To support our efforts toward meeting these commitments, we call
on our Framework Working Group, with technical support freom the IMF and
other international organizations, to develp these indicative guielines,
with progress to be discussed by our Finance Ministers and Central Bank
Governors in the first half of 2011.”

Referring to that section of the G-20 communique communique, Obama
said it “doesn’t provide an enforcement mechanism, but it does give the
international community” a way to “monitor” whether or not countries are
making progress in reducing their trade surpluses and a “mechanism to
provide peer pressure to do something about it.”

Obama also commended the communique language on exchange rates: “We
will move toward more market-determined exchange rate systems and
enhance exchange rate flexibility to reflect underlying economic
fundamentals and refrain from competitive devaluation of currencies.”

“Advanced economies, including those with reserve currencies, will
be vigilant against excess volatility and disorderly movements in
exchange rates. Together these actions will help mitigate the risk of
excessive volatility in capital flows facing some emerging market
economies,” the communique added.

Obama said the communique “strongly” makes the point that
currencies should “reflect market fundamentals” and that a nation’s
currency should “move up and down depending on the role it plays in the
international trading system.”

He used that as a jumping off point to once again apply pressure to
China to adopt a more flexible exchange rate regime. He said “we welcome
China’s rise” which has “lifted millions out of poverty.”

But “precisely because of China’s success,” he said it must “act in
a responsible manner,” including on valuing its currency.

“The issue of the RMB (or yuan) is an irritant not just to the
U.S. but to other countries,” he said, adding that “it is undervalued.”

“China spends enormous amounts of mjoney in the market to keep it
undervalued,” Obama continued, adding that “in a gradual manner” Beijing
needs to “transition” to a flexible exchange rate regime and to a better
balance between exports and domestic demand. That in turn would help
“redcuce some of the imbalances around the world.”

“We expect China to make progress on this issue,” Obama said,
repeating “we hope and expect to see progress on this front.”

He acknowledged that the rigidity of the dollar-yuan rate will “not
be solved overnight,” but said it needs to happen.

Obama said his administration “will conttinue to closely watch the
appreciation of the Chinese currency.”

And he said China and other surplus countries cannot continue to
expect to drive their economies by exporting to the United States.

In other comments, Obama said he did not want to sign a free trade
agreement with South Korea just for the sake of signing one. He said
there are unresolved issues not just regarding U.S. beef exports to
Korea, but also Korean auto exports to the U.S.

He reiterated that his first priority is to extend the Bush tax
cuts for the middle class, while saying the nation cannot afford to
extend tax cuts for upper income earners.

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