Interesting dilemmas facing G20 countries as their finance ministers and central bankers get together on the golf ball strewn Scottish coast ( a meeting in St Andrews we will be Live Blogging on MacroScope, by the way).

First, you have the Brazilians who are worried about hot money and have already slapped a tax on foreign investments in domestic bonds and stocks in order to cool down capital inflows.  They want the G20 to take action against what their central bank chief calls “imbalance- and bubble-building”.

Next you have the Americans and other big economies who know that the huge amounts of stimulus they have put into the world economy have to be removed eventually. They are not ready to do it yet, but expect the G20 countries to discuss how they are going to “sequence” the great unwinding.

And then there is Argentina, which is not alone in noticing that talk of unwinding tends to put investors on edge.  Its central bank governor wants the big countries to be careful, fearing a rapid reversal of stimulus policies could mean big outflows in emerging market countries such as, er, Argentina.

So a tricky balance, a super-sensitive investor audience, and plenty of domestic politics. Fore!

David Bowers, the one-time Merrill Lynch strategist who now co-drives consultancy Absolute Strategy Research, reckons policymakers and financial analysts have got it wrong about the credit crunch. It is not a consumer event, he says, it is a corporate one.

As evidence, Bowers’ ASR notes that of the roughly 4 percent decline in U.S. economic growth this year, around 85 percent can be attributed to a decline in the capex and inventory contribution. A similar picture can be found in the euro zone — where some  60 percent of a near 5 percent decline is from corporate. There is less of a case in Japan, but at roughly 40 percent of a more than 6 percent decline it is still a sizeabe chunk.

Bowers believes this huge decline is going to force companies to resume output because there will be shortages.  On the one hand, this will lead to improved corporate cash flows, narrrowing credit spreads. On the other a combination of inventory shortages, supply chain bottlenecks and base effects suggest to ASR that inflation is on the way.

 ”Get set for a ‘bear flattening’ in U.S. yield curve with two-year Treasuries most at risk,” ASR says.

Finance ministers from the G20 are meeting in London on Friday and Saturday to discuss the next steps in battling the world’s worst economic and financial crisis since the Great Depression.

Reuters correspondents from around the world will be at the event, taking you behind the scenes and and providing unprecedented coverage through this live blog.

Five things to think about this week:

CENTRAL BANKERS IN A HOLE
-- The global economy and financial system appear on the road to recovery but that is in large part due to unprecedented official stimulus that will have to be withdrawn at some point - the questions investors want answered are when, and how.  Central bankers no longer appear to be quite as shoulder to shoulder with one another on coordinated policy as they were last year in the aftermath of Lehman's collapse.
 

CHINA STOCK WATCHING
--  It is August, liquidity has dried up with the summer holiday season in full swing, and investors are palpably more cautious about the economic outlook now than they have been for months. It is against this backdrop that that the Chinese stock market is emerging as the focal point and driver of all other asset markets. The Shanghai Composite technically slipped into bear market territory earlier last week, shedding 20 percent in the two weeks from Aug. 4 to Aug. 19 on profit taking from the 90 percent surge this year. There is no major Chinese economic data scheduled for release this week, leaving thin markets at the whim of sentiment in what is a notoriously volatile stock market.
 

GROWTH FOUNDATIONS
-- The United States, Britain and Germany unveil revised estimates of Q2 economic growth. Revised GDP figures rarely garner much attention but with initial estimates from Germany, France and Japan earlier this month all showing that these countries exited recession in the last quarter, investors will be looking for further evidence the world economy has turned the corner. The hard data is stronger now than it has been for some time but is the global economy building a solid base for recovery, or is it more likely to buckle were authorities to begin withdrawing the massive fiscal and monetary stimulus?
 

ABNORMALLY NORMAL MONEY MARKETS
-- A veil of normality continues to cloak interbank money markets, with Libor at record lows and some closely-watched measures of money market health like Libor/OIS spreads and the TED spread almost back to levels seen before August, 2007. But that is only thanks to authorities' liquidity injections, guarantees and asset purchases worth trillions.  Banks have hoovered up this free or ultra-cheap money but still are not feeding it into the real economy, with lending to business and households still patchy at best. Euro zone M3 money supply figures for July are expected to show another slowdown in the rate of growth, to 3.3 percent on the year from 3.5 percent in June.
 
SAFE AS HOUSES?
-- Figures will show how the U.S. housing market, the epicentre of the global financial crisis, is faring four and a half years on from its peak. The Case/Shiller house price index is expected to show the annual pace of price declines slowed again in June, fuelling the belief that the market has bottomed.  But the number of foreclosures is high as the U.S. labour market remains weak, and the national housing market stock remains high by historical standards. Economists say there will be no sustainable recovery of the financial system and economy without a durable recovery in the US housing market.

The latest Blue Chip survey of economists is out this morning, and there’s general agreement on one point: the longest recession since the Great Depression is about to end, if it hasn’t already. Some 87 percent of the economists surveyed thought the National Bureau of Economic Research will eventually declare the recession ended prior to the end of September.

What happens next is up for debate. The survey found that about 16 percent expect a strong V-shaped recovery. An equal percentage expects a W-shaped double-dip recession. Most economists — about 65 percent — were lumped in the middle, looking for a long, slow U-shaped recovery.

They also seem to think that last Friday’s jobs report, which showed the jobless rate dipped for the first time in 15 months, was just a head-fake. The consensus view is that unemployment peaks at 10.2 percent, compared with the current level of 9.4 percent, and nearly half thought that level would be reached in the first quarter of 2010.

So, what’s your take? Pick a letter, any letter, but if you choose something other than L, V, U or W, you’ll have to explain it.

It’s starting to look like the Summer of Love. Two reasons: The recovery is taking on a L-U-V shape globally, and it’s going to require huge amounts of love and nurturing to keep growth alive.

• L stands for Europe, where slowness to confront deep damage and write down the remaining $500 billion odd in bad bank debt, mean rebuilding will be protracted and painful.
• The United States sports a U, bouncing along bottom right. But its financial giants swallowed harsh medicine early and the U.S. has the flexibility to stage an impressive rebound, if not undone by a fast-rising jobless rate at 9.5 percent and heavily indebted consumers.
• V stands for Asia (ex Japan), the surprise region showing resiliency, thanks to its rapid Q4/Q1 inventory workdown and huge infrastructure spend by China.

Like the Summer of Love 41 years ago, it is a drug-fueled affair. G20 governments are peddling $820 billion in stimulus this year, equivalent to 2 percent of GDP. Central bankers are spending even more. The Fed has doubled its balance sheet to $2.04 trillion the past 12 months.

These actions might have cushioned a severe cyclical downturn but the structural adjustment to a world of costlier credit is only just beginning.

Will politicians and central bankers have the wisdom or the stomach to keep the drug supply going long enough to prevent L-U-V from turning into an ugly W?

Neil Dwane, fund firm RCM’s chief investment officer in Europe, has an interesting take on the current spat between Germany and the United States over printing money to get out of trouble. You can see Juergen Stark for the latest volley.

Dwane reckons it is all a matter of history. The American psyche, he says, is scarred by the Great Depression of the 1930s. It is up there with the Civil War. Think John Steinbeck or John Boy Walton.

For Germans, however, the 1930s mean something else. It was the era that the Nazis took over, leading to the country’s great nightmare. But that, the German psyche has it, was bred in the 1920s when incompetent government led to hyperinflation and worthless money. Think one trillion marks to the dollar. Think wheelbarrows.

People have suddenly started buying cars. At least that is the implication from recent data that has surprised markets and delighted economists scrutinising the garden for the oft-cited green shoots of recovery.

First it was the United States. Yes, on a yearly basis sales plunged, but on a month-by-month comparison with February, things look a lot better. Eg, General Motors sales plunged 45 percent in March from a year earlier, but it said they were up 23 percent over February. It reckoned that increase was U.S. industry-wide, too.

Then came Germany, Europe’s biggest automaker. Car sales jumped 40 percent in March.

This is resonating with economists. Barclays Capital calculates that, globally, car sales may have risen some 4.5 percent. Advisors Lombard Street Research reckons the U.S. data implies positive real consumer growth for the first quarter.  “The annual rate of GDP decline could be 3 percent, about half the consensus forecast decline,” it said.

(Reuters photo: Mike Cassese)

Be careful this week about buying wholeheartedy into any G20-related spin about supposedly savvy, free-spending Britain and America doing more to combat the world economic crisis than supposedly stubborn, overly cautious Germany and France. The actual figures show it is much more complex than that.

A Reuters calculation on discretionary fiscal stumuli and the International Monetary Fund’s assessment show that, if anything, Britain is the significant laggard and that German spending almost matches the United States over the next two years. Here are the IMF’s numbers (% of GDP):

                                                          2009                     2010

 Germany                                             1.5                       2.0
 France                                                 0.7                      0.7
 UK                                                      1.4                     - 0.1
 US                                                      2.0                       1.8

Just to add to the complexity, discretionary spending estimates do not include bank bailouts (which would boost UK and U.S. anti-crisis spending numbers)  But nor do they include automatic economic stabilisers such as existing social welfare schemes and safety nets (which would boost Germany and France versus the U.S.  where such things are rare to non-existant).

There is bound to be some squabble over who is doing what when the G20 starts on Wednesday. Just remember the numbers.

(Reuters photo: Juan Medina)

Trade protectionism – or at least the threat of it — has raised it head as the global economy has declined, bringing with it all the historical fears about the Great Depression. Consider the flurry of concern about a “Buy American” clause in one of the U.S. stimulus bills.

It is traditionally assumed that widespread protectionism would most hurt the biggest economies, the United States and Japan. But Barclays Capital analyst David Woo says this is not so and that Russia, Canada, Australia and Sweden are the most vulnerable.

Woo studied various factors that would play on the effect of protectionism on a country, from openness and flexibility to its dependence on trade and it savings.

Japan turned out to be the least vulnerable. “Its relative closeness, relative flexibility of its labour market, and its terms of trade more than outweigh the negative contribution to its growth from a narrowing of its trade surplus in a global protectionist environment,” Woo writes.

As for the United States, “the only reason why it failed to take first place is because of its extremely low saving rate, which will limit the scope for domestic demand to offset falling exports.”

Mexico,  India and China took the third, fourth and fifth places, respectively. So it’s not all about emerging markets.