Just Pretend You"re Working - The Spirit Of G20 Summit In London Illusionary Solutions To The Global Crisis

Călin Rechea

International press see the G20 Summit as the last chance to coordinate economic policies in order to prevent a global depression. Could it be too late? If not, will the sides formed around the United States (i.e. the supporters of increased public spending) and Germany (i.e. the supporters of severe regulatory control over financial markets) manage to reach a constructive compromise?

Unfortunately, historical lessons give us no reasons to be optimistic. A recent article by the AFP (i.e. "Failed 1933 London Conference A Warning For G20") describes the atmosphere of the World Economic Conference held in London 76 years ago. The author, David McHugh, believes that economists of today have a better understanding of the causes of the Great Depression and the recipe prescribed then - balance budgets and raise import tariffs - only made things worse. The Conference of 1933 ended without results. For many years to come, France, Great Britain and the U.S. kept accusing one another for the failure.

The main difference between the two summits probably comes from an obvious shift of the power cores towards the East. While Russia still has a long way to go before it reaches the status of major economic power, China has become America"s main lender. It is on China that the success of the fiscal stimulus policy of the Obama Administration depends and recent messages are not too encouraging for Washington.

The first impression would be that the U.S. officials went to London with solutions to sanitize the banking system, as the Geithner Plan is promoted, and now governmental spending is the only thing missing to restart economies.

Intense debates in the financial press point to the contrary. Professor Joseph Stiglitz describes it as "robbery of the American people," with no effects on lending revival, according to Reuters. The so-called public-private partnership is profoundly unfavourable to the U.S. taxpayers, as indicated by Professor Peyton Young in the Financial Times. He describes the plan as a curse on citizens who do pay their taxes and states his disappointment with the attitude of the U.S. Government: "It is truly dismaying that the Obama Administration, which publicly champions greater transparency, should put forward a proposal whose main object is to subsidise the banks without appearing to do so."

Fortunately, the economic system of the free markets has the proper tool to quickly solve the crisis in the international financial system. It"s called bankruptcy. As long as authorities think that they are facing a mere liquidity shortage, all the amounts they disburse, either hundreds of billions or hundreds of trillions, will vanish without any result.

Under these circumstances, the G20 leaders decided that the main topics of the negotiations held in London should be the increase of public spending, market regulation and a limit on bonuses payable to the top management of financial institutions. In other words, they decided to legitimize the principle "just pretend you"re working" in order to contain the wave of protests looming in the coming months.

Unfortunately for the Obama Administration, the Chinese authorities have been conveying increasingly numerous messages of distrust in the dollar. The latest one was published by the Financial Times in the form of an editorial by Professor Yu Qiao from the Tsinghua University of Beijing. Its significance cannot be overlooked, for this is the university that educated, among others, the incumbent president of China and the governor of the Central Bank of China.

The Chinese professor is criticizing the stand taken by President Obama, who is trying to convince the G20 to increase public spending in order to save the world economy. "Most of Mr. Obama"s spending is devoted to social programmes rather than growth promotion, which may exacerbate America"s over-consumption problem and delay sustainable recovery," wrote Professor Yu Qiao. He added that "Conventional Keynesian policies - fiscal and monetary expansion on a national basis - cannot solve the problem but will make it worse."

China"s main problem is the stability of the U.S. currency, in which most of the Chinese forex reserve is denominated. The solution proposed by Yu Qiao is hard to digest for the Americans: turning the financial assets in the portfolios of Asian countries into real direct investments in the U.S. economy. Concurrently, Chinese acquisitions in the U.S. should be guaranteed by the U.S. Government.

This is the new face of China in the negotiations with the United States and that is why the G20 summit was useless. Expenses would have been much smaller if they had settled for a G2 summit.

Willem Buiter, a professor at the London School of Economics, believes that the summit should have started on 1 April so that the organizers could have called it a joke, in case of failure. Buiter advises us to expect nothing from the G20 summit and prepare for the worst while hoping for the best. Martin Wolf, one of the most influential Financial Times journalists, also shares the idea that the world leaders will not step up to the challenges of the global recession.

Profound divergence between the opinions of the leaders gathered in London is demonstrated also by Japanese Prime Minister Taro Aso"s strong attack on Germany"s stand. Aso told the Financial Times that "Germany has failed to understand why strong fiscal action is vital for recovery." Maybe the head of the Japanese Government should better explain how to measure the "success" of the Japanese fiscal policy in the last 20 years, given that the only result is a public debt surge to 170% of the GDP.

Recent auctions to sell U.S. governmental bonds show why Barack Obama wants to talk the other G20 members into increasing public spending. John Kemp, a Reuters journalist and a former economist with RBS Sempra and Oxford Analytica, explains that the lack of interest in U.S. bonds is concealed by the massive participation of prime traders, investment banks and brokerage firms (i.e. in the Reuters column titled "U.S. Debt Auction Less Successful Than Appears"). If these dealers fail to find buyers on the market, the Federal Reserve is ready to print "fresh" dollars to relieve them of the burden.

The U.S. Treasury and the Federal Reserve are trying for the time being to maintain the illusion of value on financial markets. China seems to have elected the path towards real values, as indicated by the daring proposal of Professor Yu Qiao. The countries that restructure their economies according to the new principles are going to become the dominant forces in the global economy when the depression is over.