G-20 makes it worse By Hossein Askari and Noureddine Krichene
The contrast between the Group of 20 summit communiques of November 2008 and
April 2009 is striking. While the first communique recognized that the surest
way to restore economic growth was to rely on capitalism, international
cooperation and the private sector, the second abandoned these principles and
called for unprecedented fiscal-cum-money intervention to restore growth.
US President Barack Obama was not present at the November meeting; his absence,
however, created uncertainty among leaders regarding the course of G-20 policy.
With Obama leading the April G-20 summit, the group has been pushed to the far
left.
While a G-20 subgroup continues to enjoy robust economic growth, large external
surpluses and sound financial systems, the
largest subgroup, ironically composed of leading industrial countries,
continues to suffer from self-inflicted wounds - namely, it has bankrupted its
own financial system thanks to expansionary fiscal and monetary policies and
unprecedented credit booms in the past decade.
These policies have now led to gigantic bailouts that will imperil fiscal
balances for some time to come, guaranteed bank debts, and to calls for
public-private bad banks to buy toxic assets. Economic performances in this
group have deteriorated between the two summit dates.
US Federal Reserve chairman Ben Bernanke's aggressive monetary policy and
anti-depression doctrine has pushed interest rates to zero and resulted in the
US unemployment rate jumping from 4.3% in 2007 to 8.5% in March 2009. Similar
disasters have plagued the UK, the European Union and Japan. Thanks to
unrestrained fiscal-cum-monetary policy, these advanced industrial countries
are now experiencing contracting output and rising unemployment.
Frustrated by impotent fiscal and monetary stimuli, this group has desperately
pushed cheap and unconditional fictitious loans, created from thin air, on
developing countries - the international equivalent of the subprime market - in
the hope of creating markets for their industrial products. Hence, after
saddling their domestic subprime with debt, these G-20 countries have turned to
bankrupting developing countries with purely counterfeited money. Such a
strategy, while dangerously inflationary, will export unemployment to these
developing countries, blow-up their banking systems, trap them in another debt
cycle and impair their development process.
The communique reads:
We are undertaking an unprecedented and concerted
fiscal expansion, which will save or create millions of jobs which would
otherwise have been destroyed, and that will, by the end of next year, amount
to US$5 trillion, raise output by 4%, and accelerate the transition to a green
economy. We are committed to deliver the scale of sustained fiscal effort
necessary to restore growth ... Our central banks have also taken exceptional
action. Interest rates have been cut aggressively in most countries, and our
central banks have pledged to maintain expansionary policies for as long as
needed and to use the full range of monetary policy instruments, including
unconventional instruments, consistent with price stability ... Taken together,
these actions will constitute the largest fiscal and monetary stimulus and the
most comprehensive support programme for the financial sector in modern times.
Acting together strengthens the impact and the exceptional policy actions
announced so far must be implemented without delay. Today, we have further
agreed over $1 trillion of additional resources for the world economy through
our international financial institutions and trade finance ... We will conduct
all our economic policies cooperatively and responsibly with regard to the
impact on other countries and will refrain from competitive devaluation of our
currencies and promote a stable and well-functioning international monetary
system.
Undeniably, the communique reads as one of Obama's
election stump speeches, with the heavy economic and financial imprints of his
economic advisor Larry Summers, now Treasury Secretary Timothy Geithner and
Bernanke. At home, with a view to creating 4 million jobs, Obama has launched
the largest-ever stimulus program at $787 billion; his budget deficit, at $1.85
trillion or 13% of US GDP, has shattered all records and pushed US public debt
to unsustainable levels, while the Fed has been creating money out of thin air
in the trillions of dollars.
Bernanke has pushed the US monetary policy on a course with incalculable
economic costs that could end the era of dollar as a reserve currency. The
outright monetization of Obama's fiscal deficits could send the US dollar to
record lows and unleash the worst inflation in recent US history.
With Obama's unsound financial policies replicated by the rest of the world, it
is impossible to forecast what the state of the world economy will be before
the next G-20 meeting. Although G-20 experts were predicting 4% real economic
growth, they forget that the private sector had never been subjected to such
economic uncertainty and fear. In such a dire financial setting, it is
impossible to predict what will be the state of the world economy in the
medium-term. How is it possible to regain control of fiscal and money
discipline? The G-20 has failed to restore confidence for a growing economy but
has instead paved the way towards growing chaos.
The communique stipulates that "Taken together, these actions will constitute
the largest fiscal and monetary stimulus and the most comprehensive support
programme for the financial sector in modern times."
The G-20 experts failed to realize that over the past decade leading industrial
countries have been experiencing the most expansionary policy in their history,
yet the "Harvard multiplier" has so far been working in reverse. They forgot
these same expansionary policies led to speculation and bankruptcies, pushed
oil prices to $147 per barrel, triggered energy and food protests around the
world, disrupted airline industries, trucking and marine shipping, played havoc
with real economies, and finally ended up with a global economic recession.
Intensifying fiscal and monetary assault will eventually revive the nightmares
of 2008 and could cause more financial disorder. While the Organization of
Petroleum Exporting Countries has renounced a previously announced 4.2 million
barrels a day cut in oil output with a view to stabilizing oil prices and
supporting global economic recovery, the G-20 wants to stoke oil prices. With
oil prices reflecting persistent upward pressure, prospects for world economic
recovery could become dim.
The G-20 experts seem oblivious to the ravages already caused by monetary and
fiscal expansion and seem to deny simple truths characterizing these policies.
Namely, large fiscal deficits reduce real savings, crowd out private investment
and undermine economic growth. Second, monetary expansion has regularly caused
speculation and banking crises. Zero interest rates will erode real capital and
strangulate banking and financial intermediation.
A simple economic principle evaded those experts: the real aggregate demand is
downward sloping: a depreciation of money in the form of a rising general price
level depresses real output. Some call it long-term stagflation. In particular,
in recession, monetary policy finances pure consumption loans and depletes
savings and investment - both necessary for economic growth. It contributes to
deepening recession and strengthening inflationary expectations.
The communique announced a world gold rush: "Today, we have further agreed over
$1 trillion of additional resources for the world economy through our
international financial institutions and trade finance."
The G-20 applauded Mexico's request for $40 billion under the International
Monetary Fund's newly created flexible credit line, irrespective of past
Mexican debt crises and the country's inability to service its debt. In this
atmosphere, maybe the G-20 would even applaud a multi-billion request from
Zimbabwe!
While domestic banks should lend against good collateral, conditionality with
international loans was meant to enhance the chance of repayment. When
conditionality is removed, a lender has no reason for blaming the borrower. All
countries will be washed with billions of dollars in reserves created out of
nothing and will spend furiously with fake money that has no real counterpart.
With oil reserves depleting in most countries and oil output stacked at 86
million barrels per day, the impact on oil prices will be obvious. In the same
vein, with depleting food stocks as noted recently by the head of the United
Nations' Food and Agriculture Organization and pressures on the limited
cultivable land, the effect on food prices could be overwhelming. Developing
countries will have to run large fiscal deficits and expand domestic money
supply to absorb new reserves and mountains of unconditional low interest
loans.
When this cheap booze is all gone, they will be left with bankrupt public
treasuries, dysfunctional domestic banking systems and a splitting hangover. As
in the 1980s and 1990s, their economies will be in a dire state of
disintegration, with boatloads of people sinking on their way to finding jobs
elsewhere.
The communique became totally far-fetched in stating: "We will conduct all our
economic policies cooperatively and responsibly with regard to the impact on
other countries and will refrain from competitive devaluation of our currencies
and promote a stable and well-functioning international monetary system."
This statement is certainly betrayed by a furious war among leading central
banks in competitive devaluation and unorthodox monetary expansion. Each
leading central bank has been endeavoring to depreciate its own currency and
avoid any appreciation; interest rates have been cut to the lowest seen in the
past three centuries. Exchange-rate instability has been at about its highest.
How monetary stability could be promoted in a system of floating rates is a
question that may elude economists, with G-20 experts holding the secret! The
blunt contradiction is inescapable in this statement: "Our central banks have
also taken exceptional action. Interest rates have been cut aggressively in
most countries, and our central banks have pledged to maintain expansionary
policies for as long as needed and to use the full range of monetary policy
instruments, including unconventional instruments." The more central banks
engage in exceptional action, the more instability and contraction of trade
volumes will be inflicted on the world economy.
Under the nostalgia of the George W Bush credit boom, the G-20 wanted to create
an Obama credit boom at even far greater scale than has existed in modern
times. The Obama team is beating the drums and making everyone dance the world
over. Financial regulation becomes totally irrelevant when central banks are in
pursuit of destroying currency. The world is now doomed to medium-term economic
instability. So many uncertainties loom ahead. The inflationary consequences of
G-20 approach could be devastating and may push vulnerable countries to the
brink of starvation as seen in 2008.
Obama was elected to implement change. Unfortunately, his policy gurus have
decided only to intensify previous financial policies and spread them far and
wide. When insanity spreads you can only hide your sanity. Spreading insanity
around the world is itself insanity. The G-20 could have spared the world
economy unnecessary suffering. Unfortunately, it chose the continuation of
financial disorder. The world cries out for private investment and growth,
while the G-20 creates fake money and impairs growth.
Hossein Askari is professor of international business and international
affairs at George Washington University. Noureddine Krichene is an
economist at the International Monetary Fund and a former advisor, Islamic
Development Bank, Jeddah.
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