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May-20-2009
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Views expressed here are author"s own and not of this website. Full disclaimer is
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(The author is a Professor in International Economics in Nagasaki University, Japan)
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Tasks in front of the G-20 leaders were to produce a framework to solve the world economic crisis by thinking out of box. Instead they want another round of "stimulus" without learning any lesson from George Bush and Gordon Brown of UK, who just gave away more than $900 Billion to the Anglo-American banks and financial institutions without restructuring them and as a result money just disappeared in a black hole without creating any solution yet. Much of these stimulus plans are empty promises or reallocation of already budgeted expenditure. IMF will get a new $250 Billion worth of Special Drawing Rights or the artificial currency composed of averages of major currencies to help the countries with severe foreign exchange crisis. Its assets would go up by $500 Billion. Otherwise the plan calls for budget deficits of about $5000 Billion for the G-20 countries without telling us how this money will be utilized. As a result, power of the IMF over the developing world will be increased but it is the last organization in the world to energize any future economic growth, given its dismal record so far to provoke only economic ruin and deprivations instead. Questions should be asked whether the stimulus plan can be effective and where the money would come from.
Globalization has massively increased the vulnerability of the world"s financial and economic system. Every day trillions of dollars is transacted at the speed of light, much of it unregulated. The derivative products or gambling of various kinds on every financial future market have accrued to the level of hundreds of trillions of dollars, unmonitored by any governmental authority. In essence, a vast global financial superstructure has been erected on a fragile foundation, which is just as worst as the sub-prime securities or loans to poor American to buy houses knowing their inability to repay but then selling these loans as assets to the rest of the world. Further erosion of the U.S. fiscal posture, resulting from exploding budget deficits and the cumulative national debt, will rapidly negate the very temporary boost from the stimulus package, while facilitating further catastrophic macroeconomic destruction all over the world.
In USA that gave birth to the global financial crisis and credit crunch the government"s finances have been driven to the brink of bankruptcy by vastly excessive military expenditures, run amok by a losing war in Afghanistan and an unnecessary war in Iraq. Military adventures in Afghanistan and Iraq have wasted at least US$1 billion daily in taxpayers" money for the last few years. The national debt of the United States of nearly $10 trillion even before the onset of the global financial crisis is a reflection of that fiscal reality.
There is no proposal in the G-20 meeting for reductions in these wasteful American military expenditures. Instead, American defense secretary Robert Gates is proposing that the United States should spend $654 billion on its military in the fiscal year of 2009. The planned military budget for 2009 represents a 72% increase from 2000, the year George W. Bush was elected president. At a time when the United States in sinking deeper in debt amid a devastating economic crisis, does a bloated military budget that requires Chinese and Arab loans to finance represent a true enhancement of U.S. national security? To maintain the status quo is to proclaim that the United States can borrow money indefinitely from China and Arab oil producers, using those funds to pay for a gigantic military program to protect USA from China and the militant Islam promoted by the same Arab oil producers!
According Charles Kindleberger a stable international monetary is possible only where there is a world power able and willing to bear the burdens of responsibility for the preservation of the prevailing system. Such a leader must also be prepared to act as a lender of last resort. Britain played this role in the nineteenth century. USA was to play this role for much of the twentieth century until 1972 when Nixon in order to finance the Vietnam War started having the same irresponsible policy as used by George Bush to finance his invasion of Iraq. The decline of a "hegemon" is now reflected in a series of international financial crisis one after another; first was the stagflation of 1970s, followed by the debt crisis of 1980s, stock market crash of 1987, recessions in early 1990, stock market crash of and Asian financial crisis of 1998 and now the worldwide financial crisis.
Tragedy unfolded: Financing the stimulus package
The United States is currently without much money, from a fiscal standpoint. To finance the massive amount of spending being planned by the G-20 leaders, USA alone needs to borrow at least a few trillion dollars primarily from foreign creditors like China or the Arab oil producers. The only way the U.S. will be able to attract foreign credit in this context is through much higher interest rates. This will kill private borrowing, stifling investment and ultimately defeating the purpose of the stimulus spending. The other alternative is to simply print the money, and produce a hyperinflation.
UK banks are "technically insolvent" just like their American counterparts. The Brown government"s expenditure of nearly $400 billion to prop up British banks has failed to curtail the affects of the credit crunch. European banks may be holding as much as 18.6 trillion Euros or $24 Trillion in terms of derivatives, mortgage backed securities, options, and worthless bonds of already bankrupt banks and major companies, commonly called as "Toxic Assets", which is at least $6 Trillion more than the combined GDP (Gross Domestic Products) of the entire European Union, and $10 Trillion more than GDP of USA. The International Monetary Fund indicated that its toxic assets now amount to a staggering $4 trillion. As the U.S. and Europe feed upon each other"s economic decline, these destructive waves will increasingly drown other major economic engines on the world like China, Japan, and Southeast Asia.
Japan"s economic growth figures for the last quarter of 2008 show a contraction of GDP by 12.7%, with every indication that this measure of economic deconstruction will grow even more dire in 2009. In January 2009, Japan"s annual exports revenue declined by almost 50 percent. The United States, which remains the single most important market for Japanese products, reduced its imports from Japan by 58%. Exports to Europe declined by 54.7% while shipments to China plunged 39.7%. When it comes to one of the most important and visible Japanese exports, automobiles, the decline was a staggering 70.9%. Japan is so far the primary purchaser of U.S. government debt. Now as the American consumers purchase fewer goods from Japan, it is now in no position to provide loan to USA.
China by becoming the factory for much of the consuming world has accumulated a huge surplus in her balance of payments, and this cash pool was used to loan money to the United States, its major customer. Now that consumer demand in the U.S. is contracting, China will likely need to shift its accumulated savings to solve its own problem of at least 20 million newly unemployed workers and possible recession in 2009.
The Chinese economy also has fueled economic expansion in much of Southeast Asia in recent past. Enterprises in South Korea, Taiwan, Thailand and Singapore, as well as other Southeast Asian nations, provided raw materials, products and services that were incorporated into China"s vast economy. Contraction in China will be devastating to the economies on her periphery. Depression in Japan and China are spreading on the economies of East and South East Asia fast. The Gulf Arab states, another financier of USA, are also being affected by the crisis, as the reduction of oil prices has created severe budgetary constraints in the previously abundant treasuries of the OPEC countries. There simply will not be enough credit in the entire world to finance the budgetary deficits that are likely to arise in the United States as well as other major economies.
A banking system that is insolvent is dysfunctional in the extreme; it has frozen normal credit flows throughout the global economy. This is why, all the costly deficit spending on economic stimulus packages being enacted in the G-20 countries are doomed to failure. The foreign credit markets the United States relies on for financing its deficit spending will simply lack the capacity to loan all the money needed to re-capitalize America"s banks.
The American consumers, always over-burdened with debt, are always ready to purchase more by the easy access to credit. Now they are being denied this. With the collapse of consumer demand in the United States, factories in China, Japan, Taiwan, and Southeast Asia are throwing millions of employees out of work. This in turn is collapsing internal consumer demand in those countries, further exacerbating the shortages of global demand. The Asian contraction in consumption is leading to global demand destruction in commodities, facilitating the deadly virus of global deflation.
Emptiness of the Stimulus package:
Only a radical surgery can bring this man-made catastrophe into remission. However, policy makers throughout the world are suggesting the usual doses of debt-funded stimulus spending, while borrowing even more money to throw into the black hole created by the Anglo-American financiers and bankers. They tried monetary policy, however with interest rates on central bank funds in many major economies at effectively a rate of zero, monetary policy is now ineffective. The massive debt-driven stimulus spending plans being unveiled by the political leaders of the G-20 economies will only accelerate the path to global economic disintegration through massive insolvency of the central banks in most countries.
The degree of recapitalization essential for restoring a solvent and functional banking system far exceeds what policymakers in the U.S., U.K. and remainder of the EU have committed thus far. Asian banks have so far been spared the worst ravages; they should not feel overly secure, as they also have purchased a huge amount of these toxic assets from the Anglo-American banks. In addition, protectionism in the developed world will exacerbate the economic and financial crisis while creating rivalries and tensions involving the United States and her allies.
The Farce of the UN Economic Commission
The UN Economic Commission has produced a report as well, which contains only traditional medicines already suggested by the G-20. The measures call for some restrictions on global trade on derivatives and future market and gradual replacement of Dollar as the international reserve currency by the SDR (Special Drawing Rights), the artificial money created by the IMF back in 1978 but could not get off the ground. These solutions are not only standard but also unrealistic.
G-20 also has allocated about 250 Billion US Dollars to promote SDR through IMF but in reality USA does not want SDR to replace Dollar, as the Dollar is only a "fiat" currency backed up by nothing but the reputation and power of USA. If SDR replaces Dollar, value of Dollar will go down to a very low level, USA will be unable to pay for its imports and to project its power all over the world. Thus, there is a vested interest in USA to maintain Dollar as the reserve currency. In addition, SDR, a weighted index of several major currencies of the world, is only a concept, not a currency one can hold physically in reality. Its value, just like the value of an option or derivative depends on complex calculations of relative weights for each currency and their future values. Thus, just like a derivative or an option, SDR is an unreliable concept to start with.
UN Economic Commission needs to understand that just like small pox it is not possible to just control derivatives or options or future trading; a complete eradication is needed. It is essential to get rid of these as the toxic features of the world financial market. The secondary stock market is also dangerous stimulating speculative activity, which does not serve any long-term productive purposes but can cause world economic crisis as it did in 1929. However, both G-20 and UN Economic Commission are silent about these issues.
Conclusion:
The problem can be solved if there is a will to solve it, but that was lacking among the leaders of the G-20 those who have gathered in London. All speculative activity must be eliminated by banning all trading of derivatives, options, future contracts, and secondary market for shares. Companies that need to raise more money from the share market must be valued not by the share market, which has proved itself to be irrational and emotional, but by an expert committee appointed by the government. IMF can be turned into a massive central bank of the world, the bank of last resort for all national central banks, what Keynes had suggested in 1945. All existing derivatives and other toxic assets (?) in the banks should be cancelled and the banks those issued these in the first instances would be made responsible for the payments at the initial selling prices. Banks those who had purchased these subsequently should be made responsible for their irrational greed.
However, to solve the massive unemployment and destruction of exports of most countries of the world, national investment planning with managed trade regime is required. Free market has failed to allocate resources efficiently, thus, there is now the need for the planners to allocate resources to provide jobs for the unemployed. For that banks should be nationalized along with the major companies. Instead of free trade with flexible exchange rates there is a need to have the reestablishment of fixed exchange rate regimes as it used to be before 1972. In that case instead of free trade each country can pay for its imports by its own currency, not only the US, so that the exporting country will be forced to buy goods and services of equivalent amounts from the importing country thus having a balance trade all around. That would not mean either protectionism or the jungle of free trade regime.
However, the burning question is whether President Obama or Prime Minister Gordon Brown or even India"s inarticulate prime-minister Man Mohan Singh would like these measures at all let alone to implement these. Instead if they just throw money at the advancing forest fire, millions of people all over the world will be turned into destitute within the next two years. During the last depression of 1930s, at least a million people were starved to slow death in the richest country USA alone, as described by John Steinbeck in his novels. During the current depression there will be many millions of deaths due to deprivations and starvations caused by mass unemployment all over the world.
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