By Chris Gaffney, CFA  

The deteriorating world economy adds to the urgency surrounding tomorrow's G-20   meeting in London. The news media has set expectations unreasonably high for this meeting. In fact, they believe we’ll see an actual solution to the global economic slowdown.  

Unfortunately I don't agree. The main focus of the meetings will be establishing new regulations for the global financial system.

Treasury Secretary Geithner already laid out his design plans over the past few days. His ideas include greater hedge fund regulation and expanding federal regulations for the currently unregulated exotic financial instruments like credit default swaps (CDSs). Tim also wants to impose tougher standards on financial institutions that are “too big to fail” because they’ll cause a risk to the entire financial system.

Leaders from Germany and France don't believe these plans go far enough. In fact, President Sarkozy threatened to walk out of the meetings if the G-20 doesn't put more teeth in the regulations proposed by the U.S. and the U.K.  

But U.S. financial firms still dominate the global system, and the job of regulating these firms falls to Geithner and the United States. So while the rest of G-20 may want to demand tougher regulations, the political landscape in the U.S. won't allow it.

Meanwhile President Obama will join the event’s host, Prime Minister Gordon Brown to try and convince Europe to follow their lead and put together sizable economic stimulus programs to jump-start global growth. The U.S. has taken the lead on deficit spending (no surprise there!) with the administration spending US$12.8 trillion in their stimulus efforts, close to the U.S.’s total GDP for 2008.

But European leaders worry about the inflationary consequences of these huge stimulus projects. They’re hesitant to rack up more debt that their citizens will have to pay. They don't want to risk their economies’ long-term health for a quick path out of the current economic quagmire. Can you blame them?

I know Obama is an excellent orator, but he is going to have to be at his all-time smoothest to convince these other leaders to follow his lead. The U.K. and U.S. economies aren't a picture of health right now.

Not to mention, the quantitative easing measures they are pushing on everyone else are mostly untested. (In other words, who knows if they will work?)

The Dollar Will Likely Remain the World’s Reserve Currency BUT Countries Will Still Dump the Buck Regardless!

While global financial regulation will certainly be a topic addressed during the summit, I can tell you a topic which won't get any traction: a move toward a global currency to replace the dollar.

For all of the press China and Russia have garnered with their proposals the past few days, the U.S. will block any serious attempts to discuss an alternative to the U.S. dollar.

We’ve already seen a lot of the damage to the dollar’s credibility as the world’s reserve currency. And regardless whether an official alternative to the U.S. dollar is found, foreign countries will continue to diversify their reserves out of the dollar.

Data from the IMF released yesterday showed the dollar's share of official foreign exchange reserves fell last year, while the yen and euro gained. The dollar accounted for 64% of the reserves, down slightly from the month prior.

As with financial regulation, each country has its own agenda with regard to its reserves, and the trend away from U.S. dollar will likely continue, no matter what is or is not decided over the next few days in London.

Basically, each leader to the G-20 summit is showing up with their own set of problems, and the U.S. and U.K.'s problems are some of the worst. It’s ludicrous to think these leaders will solve all of these diverse problems in just eight days.

While the meeting will hopefully start us on the path toward global financial reforms, I expect the global markets to be disappointed with the lack G-20 progress.