Thursday, March 26, 2009

Cancel the G20 Summit?

A version of this post appeared in both the Waterloo Record and Guelph Mercury, Ontario on March 30th

As Gordon Brown, the British Prime Minister, dashes around the Americas hell-bent on positioning himself as the savior of the world, the G20 summit to be held for a few hours next week is looking increasingly problematic.

The Governor of the Bank of England, Mervyn King, said this week that additional borrowing to fund additional stimulus or tax cuts would be “unwise” – code for not possible. An attempt to fund UK debt on the markets by selling gilts failed, with buyers showing themselves unwilling to partner with Government in the pursuit of long term debt based society. The UK is now using banks it owns to buy debt it created funded by the debt itself. A sure sign of trouble to come.

The President of the EU and the leaders of France and Germany have all signaled that additional stimulus would be unacceptable to them with the EU President suggesting that additional stimulus in the US was “the road to hell”. They are concerned at the mounting level of indebtedness of the EU. Ukraine has just defaulted on the terms of an IMF loan and is technically bankrupt and several eastern European countries who are members of the European union are in serious financial and political trouble – the Czech government, for example, failed in a confidence vote on its handling of the economic crisis this last week.

Yet the US President is pushing additional stimulus as one of his conditions for success at the G20 summit. Prepare to lose this one President Obama.

There is strong talk, especially in the US and in parts of Europe, on the need to better regulate the financial system, especially derivatives and sub-prime activities. The US Treasury Secretary has asked for strong additional legislative power and the UK are reviewing all financial systems regulations, including regulations relating to insurance companies and non banking financial services and hedge funds. Included in this is a strong desire to end tax havens. On this all seem agreed, though it is worth pointing out that the G20 already agreed to all of this at its meeting in November and committed to having a new regulatory framework in place by next Tuesday. The April G20 summit is this likely to reaffirm what it has already done.

What the G20 will not talk about is probably more interesting than what they will talk about. They will not talk about what to do about failed states – Iceland and Ukraine. They will not talk about the toxic debt which several countries are building up, including the US which cannot even get its estimate of debt right (the President and the Office of Budget are disagreeing to the tune of $2.3 trillion and both are underestimates according to most commentators). In fact, US debt is already at $10 trilling and growing (personal debt is another $13 trillion). The G20 will increase subventions to the IMF and boost its role and then promptly knock at its door and ask for its money back. Lowering debt levels to less than 2-3% of GDP should be the discussion, but will not be.

The protectionism of the G20 will also not be discussed. The World Bank reported last week that some forty seven countries, including seventeen of the G20, have enacted protectionist measures since the G20 last met. This has occurred despite the oft repeated rhetoric that protectionism is not a response to a global economic crisis. This kind of talk should now seen as code for “this is exactly what we intend to do”.

The third thing that will not be talked about is the folly of green jobs. Obama and Brown are pushing the idea that this is the moment to renew a commitment to greening the economy – focus on renewable energy and create a new economy. As the experience of other countries has shown (see the story about Spain and wind power elsewhere in this blog), this is code for job loss from other industries, higher energy costs and increased debt as all of the renewable industries depend on grants and subsidy over a very long period of time to be viable. The post-modern narrative beats evidence and reality every time, but there enough cynics and evidence based economists around to point out that the Emperor has no clothes.

So pointless is the coming G20 summit that some are calling for it to be cancelled. It will cost close to $250 million US and will take place for a day and a half. Don’t hold your breath for anything really exciting.

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