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LinkedInIn a beautifully written leader — one marked by a broad historical sweep — the FT lays out its agenda for the London G-20 agenda.
“Participants [at the London G20] must agree on three points.
First, world demand is in freefall. Stimulus is necessary. The surplus countries with the most leeway to increase domestic spending – Japan and Germany, in particular – are not yet doing enough. They can afford to encourage serious spending and are, in any case, suffering the steepest contractions. In addition, if these habitual exporters were to become serious importers, it would be politically easier to hold back protectionism.
Second, governments must take responsibility for dealing with their financial systems. The toxicity which started in mortgage-backed securities is spreading through the world’s banks as ever more assets go bad in the recession. Politicians must make sure that their banking systems are adequately capitalised and deal with the illiquid securities at the heart of this crisis.
Third, governments must agree to put aside more money for the International Monetary Fund. The recession would enter a new, dreadful chapter if a rash of financial crises broke out across eastern Europe, Asia or South America. The fund’s current funds are clearly inadequate. The idea of a large issuance of SDRs – the IMF’s own reserve asset – is an excellent one. Changes in voting-weights, to raise Asia’s share and lower Europe’s, are also both inevitable and desirable.
What matters is that there is agreement on these three issues so that politicians – even those in weak governments, as in Japan – are given the political cover to do what is necessary. A united front is, therefore, essential. Big questions about the shape of the broad future of the world economy can wait until we are certain that there is a future for globalisation.”
I basically agree.
Just think how remarkable the last sentence that I pulled from the FT leader is. The FT has long been among the most global of newspapers in its outlook and coverage. And right now it isn’t certain that “there is a future for globalisation.” Harsh, but probably accurate. At least if the FT means the current form of globalization. The current shock is testing a lot key assumptions.
Eastern Europe didn’t globalize so much as Europe-ize, but the capital flows from “core” Europe that many Eastern European economies relied on have now dried up. Being part of “Europe” has not quite been the (financial) shock absorber that many in Europe’s East hoped. Asian economies that were burned by a sharp reversal in capital flows in the 1990s tired to insulate their economies by globalizing in reverse. The uphill flow of capital from Asia to the US (and increasingly Europe) was mean to insulate Asia from a sudden reversal in private capital flows. But it also left many in Asia exposed to a sudden fall in US demand for their products — and right now such a fall is generating as large a shock to output in emerging Asia as the shift in capital flows produced in the 1990s.
The strategies that various countries will put in place to minimize their exposure to a repeat of the kind of shock the global economy is now experiencing still aren’t clear.
Nor is it clear that the G-20 will be able to agree on the FT’s suggested agenda. Europe doesn’t seem inclined to set out additional stimulus, reaching international agreement that banks should be adequately capitalized is far easier than reaching domestic agreement on how to capitalize troubled banks and I am not yet sure there is agreement to expand the IMF’s resources …
UPDATE: Martin Wolf has more. He forcefully makes the case that the G-20 needs to focus its current efforts on sustaining global demand. Dr. Wolf must have had a hand in the leader as well ….
I wonder why they are calling Japan a “surplus country”. It no longer is.
And funnily, another piece in today’s FT explicitly argued that Japan will find it much harder to finance its budget deficit now that it no longer enjoys the luxury of an external surplus.
Somehow, the FT can’t quite make up its mind on this subject…
The FT agenda can be summed as follows: Just throw more money at the problem to make it go away, but please don’t bother to ask why, or how.
This clearly can be only part of the solution. While I agree that bankers’ pay should not be high on the agenda, governments must be put into a position in the future to collect the taxes necessary to downpay the huge debt they are all running up right now. Also, I would see sending money somewhere without asking questions as equivalent to helping some crooks and incompetents (inside and outside banking) continue as they have done so far.
I also agree that it is important to keep globalization alive, but only to the extent that it actually helps people in the broad sense to live a better life. Globalization will only have a future if it is supported by the public mood, and I don’t see how that can happen by just implementing the FT suggestions without also tackling regulatory and related governance issues such as tax havens and a resurrection of Glass-Steagall, to be applied by all G-20 countries and adjusted in a way that it is meaningful in a globally integrated financial market.
I susupect the FT suggestions that the financial framework issues should be dealt with later really intend to postpone that debate until forever. The time to deal with regulatory issues is now (actually, the debate should have started in August 2007). They used to shout “No taxation without representation”, now it should be “No taxpayer money without regulation”.
http://www.nakedcapitalism.com/2009/03/former-australian-prime-minister.html
Keating gives opposing viewpoint of IMF:
“Paul Keating, former Austrailian Prime Minister, gave an assessment of Timothy Geithners’ performance in the Asian crisis that is sharply at odds with US reports. According to Keating, Geither completely misread the nature of the crisis, that it was the result of hot money flight, but reverted to the standard IMF “country facing currency crisis” playbook, and made a bad situation worse”
Great article brad! would be a shame if globalization came to a halt. i guess it’s a question we’ll find an answer to over the next 6-12 months.
With Roubini’s forecast of $20/oil, this suggests a complete halt of transport.
Bad dream?
GB is not a signatory of the treaty of the European Union and is not bound by its covenants DEBT/GDP
Fiscal deficit/ GDP when members of the european union are not only bound but liable to their citizens.
Not much is written about a redistribution of currencies weighting in accordance to the trade flows?
Of course, not all “surplus countries” are created equally, and many in East Asia have found their surpluses disappearing overnight. I can see at least three different kinds of “surplus countries”:
[1] big govt deficits and big forex reserves (e.g. Japan, Singapore)
[2] small govt deficits and big forex reserves (e.g. Korea, Taiwan, China)
[3] small govt deficits and small forex reserves (e.g. Germany, Canada).
So is the stimulus proposal that [1] will spend down their forex reserves, [3] will run big budget deficits, and [2] will do a mix of both — and in light of crashing exports, probably rely mostly on spending down reserves?
And if spending down reserves is a big part of the global stimulus strategy, who is going to buy Obama’s $1.75tr debt issue???
The Rock: Stimulus=Inflation
The Hard Place: De-leveraging=Deflation
the global current account surplus is heading down, so the deficit will increasingly have to be financed domestically (us external deficit is also down, mostly from oil). with household savings heading from 0% of income to 8-10%, there will be a new source of domestic savings even as domestic investment falters, which again implies more us financing for its fiscal deficit.
kaiane — exactly right. gotta choose where the biggest risks lie tho
The link below has the voting power shares at the IMF.
http://www.imf.org/external/np/sec/memdir/eds.htm
In simpler terms, a voting/quota share determines the amount of forex that each country is eligible for out of a total increase in SDRs. SDRs are electronic credits from the IMF to countries, that can used for foreign exchange. This is like an equity stake that each member country gets in IMF combine.
The link below takes you to an FT Op-ed by Edwin M. Truman, after he took office as the US Treasury’s IMF person. (Title: ‘How the IMF can help save the world economy’)
http://www.ft.com/cms/s/0/ccafa8d4-09b8-11de-add8-0000779fd2ac.html
And here’s a link to another Op-ed by Ted Truman on IMF Reform:
http://www.petersoninstitute.org/publications/opeds/oped.cfm?ResearchID=1106
Ted Truman proposes overall, an increase of $250 billion in the world’s foreign exchange through SDR credits from the IMF. And, somewhere between 5 and 10 percent of voting rights will be re-distributed away from “traditional industrial countries” to others (as a best case).
Currently the United States has 16.77 % of IMF voting rights, and China has 3.66%. Australia has only 1.47%; (thanks a ton for posting the above article that shows that Geithner was the US Treasury IMF person during the 1998 Asian crisis.
Brad Setser: And right now it isn’t certain that “there is a future for globalisation.” Harsh, but probably accurate.
Me: It’s much harsher for the US than for any other country in the world. And that’s why George Soros refers to the situation as being akin to “the break up of the Soviet Union”.
With a total of more than $10 trillion, or more than 80% of GDP in public debt: if globalization meets a sudden demise, and foreign financing for the US Treasury evaporates quickly; what next?
The US plans to accumulate another $ 3 trillion in deficits over the next few years. And it’s in a perpetual debt trap, where it pays interest on its loans by borrowing – that too, as you pointed out in your Sovereign Wealth paper, the borrowing relies quite a bit on foreign financing.
Indian investor — posts with links tend to be span, ergo they get moderated.
Brad
not much of a shocker eh? after all, the various economies are behaving much like hedgehogs (from hedgefunds we’ve come to hedgehogs , hmm go figure) – protectionist sentiments are nothing new, disguising them aren’t exactly the most subtle of camouflage either. The biggest question is what exactly are we globalising – the upside as well as the downside and right now most people want to hit the disconnect button. The Obama team has rejected the South Korean FTA – how’s thaqt for a hint at things to come? Food for thought . Wonder how the KOSPI and the won will react.
A bit off-topic but any idea whether established EU members are going to go to the rescue of weaker memebers or neighbours Eastern Europe in particular?
China has been quite clear they will not give substantially more money to the IMF unless the U.S gives up its veto power (i.e. >15%).
I don’t see that happening, therefore much of the ink spilled about the G20 has been a charade. Currently the developing world needs upwards of $ 700 billion dollars for 2009 alone – $250 is not enough.
Few countries see this as about saving globalization (whatever that means) – this is about crude power plays and dominance and access to world markets.
Brad, I think pointing to the rise in the US savings rate is somewhat misleading as a future source of funding for US govt debt.
The personal savings rate has been over 2.0% for only four months. In three of those four months — the most recent three in fact (Nov ’08 to Jan ’09) — wages and salaries fell on a seasonally adjusted basis, as did proprietors income and income receipts on assets. The only source of personal income that is rising is transfer payments from the government.
Thus the impressive rise in American household saving over the last four months is thanks almost wholly to the concomitant impressive rise in American government debt. The left hand loaning to the right hand via US households isn’t a recipe for success.
Edmin M Truman at the US Treasury (formerly Peterson Institute) is the US representative at the IMF. This position was held by Geithner during the 1998 Asian crisis. Currently the US has 16.77% of IMF voting rights, China has 3.66% and Australia has 1.47%. The IMF web site has a page called Executive Directors and voting powers which mentions the quotas. Truman’s proposal after taking office is to increase the world’s total forex by $ 250 billion through SDR allocation. The above voting/quota percentages represent the share that each sovereign country gets in the IMF combine. Earlier Truman proposed reforming the IMF by allocating around 5% of existing voting rights from traditional industrial countries to others, to improve the IMF’s legitimacy as an organization not completely dominated by the United States.
I humbly beg to differ with the FT leader and Dr Wolf. If this is what passes for “sound thinking”, then Lord Have Mercy on Our Souls.
I do not know where to start. Who can afford to increase spending? Are the editors of FT so out of touch or is beautiful California in a different planet? (UK households are not doing any better, from what I hear.) The family of (real person living in California and with two kids in college) has an income higher than 96% of American families but is faced with an annual cash-flow shortfall of $50K per year. (Two recently forced to retired professionals, age 50, no kids but living in California) have enough savings to last about a year.
Governments have a role to play but what they have done so far (and I mean the last twenty years) does not inspire much confidence.
Sustaining global demand is a good idea as long as it is not by extending more credit to those who are already suffocating under it.
The FT offers us a recipe of past, meaning a recap of was on the table back there in september 08.
Since then it was established that regional MFs are as good if not better as an international one. Europe however still holds both possibilities on the table and such recipes as FT s will lead em to a brand new EMF (probably through EIB). Funny how the single most important theme for the globalizers – outlawing fiat state or para state insurance of overdeposits and fiat insuring of banks debt is not what FT would discuss in the »IMF slot«.
As for dealing with toxics – here is a clear case for derivatives unwind due to fraud and I sincerely doubt it will be a »national« affair so it is here that a case for globalisation still (per/ex)ists. Or conversely you can settle that through reparations. On the recap of financials, isn t here that a clear case for debts forced into equity with some CBs nationalisations (they re real cheap in comparison) already established? You can also detach them in two parts (copy-paste liabilities in both parts) as a step one.
The FT proposal is not particularly original (good policy rarely is, though) but it suffers from most proposals that aim at reconciling two incompatible goals: (1) to preserve the economic benefits of “globalization” (whatever that may mean) and (2) to satify the needs of voters in national, democratic polities.
Even if this process can prevent the leaders of those national polities (who would like to free ride the stimulus efforts of the others, and as solely responsible to their national audiences, are bound to do so) to shift the burden to their neighbours, it may work. However, the process will take too long.
The proper solution is, of course, to do nothing and let it burn out. Strangely enough, if all countries fail to coordinate their efforts, nothing may be done, without anyone getting the blame. Beautiful, is it not?
First, world demand is in freefall. Stimulus is necessary.
NvF First, world productivity is increasing. Stimulus is not necessary.
Second, governments must take responsibility for dealing with their financial systems.
NvF Second, governments must force the financial system to price their assets at market.
Third, governments must agree to put aside more money for the International Monetary Fund.
NvF Third, governments must properly collateralize their currencies. The IMF? The IMF doesn’t even take purchasing power into consideration when collateralizing their SDRs.
@Thomas – The FT is spin. Obama made a point of mentioning that the US ignores the econo-blogshpere. I can’t believe it.
@Mathias – governments don’t have debt. Citizens do.
@anon – it wasn’t hot money. Off-shore banks use fractional reserve financing of USD. There is an unspecified amount of leveraged and completely uncollaterized USD in the system. The only way the US can find out how much is in the system and flush the system is to call in the currency at 2:1.
@lia – GB has special tax rules of companies that are registered in GB but do no business there. It is (perhaps) the oldest off-shore play. Despite that, 1 trillion got flushed out of The City.
@GeneralGlut – the 780 billion stimulus package will cause flow-throughs to the banks. People will use the cash to pay down their credit cards, consumer loans and mortgages. This will allow the banks to buy Treasuries. Hence the delta in the financing that Brad identified in a previous post
will be covered by funny money. (the sneakiest form of monetisation possible – possible only because the private corporation called the Fed and the banks holding “good as cash” treasuries can leverage it). It won’t work. They aren’t fooling anybody.
@BigOil – half the population of the world is under the age of 25 and poor. Globalization is now a pricing restructuring on a regional level. Counter-party risk has suddenly become personal – aka people do business with people. Example : in Asia, the yuan rules now.
@Kaiane – deflation is a motor of productivity (look at the computer business). Businesses won’t build something until somebody wants to buy it, and people won’t buy anything until they need it.
@purple – the IMF is irrelevant. Countries with cash are now collateralizing their currencies with commodities. Countries without cash want their gold back from the IMF. Read their web site.
@Indian Investor – what can I say? I think I would have to agree with Brad – please offer more “what comes next”? In particular, I have very poor intel about India. Lots of numbers please. I would appreciate that.
@MakeMeTreasurySecretary – perhaps you can convince Brad to look at productivity and purchasing power as a theme for his blog?
@Iocccocco – I’ve been following this blog for months. Your comments are worth their weight in platinum? vanadium?
@Rien Huizer – it’s about people. I would suggest that nobody in the whole world is “doing nothing”? On the other hand, doing something – and I apologize in advance for what would seem to be a flattering comment in the wrong place – Doing something with good input from Brad is something worth thinking about doing?
May I finish with a little thought? It is something that has been bothering me a lot. If I hear one more blogger refer to people as “consumers” I will be somewhat disappointed. They aren’t “consumers” – they’re people. Cancer is a consumer.
I’ve notice that a young blogger named Matt Stiles at futuronomics (on blogspot) has opened up the discussion of productivity. My opinion : worth a look. Non-affiliation : never met him, but his blog is pretty good. It would seem that he is the first econo-blogger (and I read a lot of them) to actually use the P-word. I was hoping that Brad would be first out of the gate on this one.
Suggestion to Brad – how about a look at productivity world-wide?
Thanks to all of you! I’ve been following this blog for some time. What a team!
NvF — I tend to focus on things I feel like I understand. I am (I hope) something of an expert on the balance of payments and related issues. That is what I have spent my professional life working on. At the Treasury. And at the IMF. Productivity not so much . Don’t get your hopes up.
Thanks for the comment! Perhaps Productivity will eventually wander into balance of payment calculations and related issues.
Do you know of someone who is good at the Productivity thing? Surely someone at the IMF or the Treasury has a blog which considers productivity an important delta?
And thank you for a great blog.
NvF
Welcome, doing nothing (“letting it burn out”) is an economically defensible approach for financial crises. The financial crisis and the recession that just started are not the same. I could be convinced that the recession could benefit from a less minimalist response, but only if properly coordinated. Keep in mind that every small open economy, from Singapore to Holland, has strong incentives to let the big countries (whose financial regulators were to blame, remember, or something to that effect) do the heavy lifting, and as a voter in such a countries I would expect my politicians to do no less, because (a) my stimulus dollar will benefit countries that export to us and (b) if the big guys can rekindle world trade, our intergeratalional balance will be better than that of our competitors. And, of course, the big guys cannot afford to do nothing, not even non-democratic China. So even if we sit out, it will not matter.
That is a type of logic that can effectively paralyze any kind of coordination effort (remember that a globalized world needs a global response) . The result would be that economically misguided Keynesian policies are unlikely to dominate, as well as (yet to be invented) non-misguided ones. We may not treat the financial crisis optimally (by not letting it burn out) but we surely are not going to implement effective keynesian policies on a world wide basis.
@Rien Huizer
Aikido is a wonderful thing. I saw a beautiful demonstration of Aikido at a martial arts demonstration in Brussels a couple of decades ago.
It wasn’t a tournament. All styles were represented. It was a “no lies” demo.
The little old Aikido master was circled by a dozen of his best students. The students were told to attack him at their very best – simultaneously. In seconds, all twelve of them went flying – like a flower blossoming.
“Letting it burn out” is very Buddhist. In Aikido I think that the expression is “let them run empty”?
The empty hand? (Karate)
The problem today is a bit different? Yes – a touch lighter than it takes to caress a flower is enough to send a strong fighter flying through the air. Technical problem? That touch may now be contagious. Which has serious stochastic implications for things like trade balances.
The biological weapons today do not allow even a single touch.
What does that mean for trade balances?
Calculate what SARS did to the Canadian trade balance. Imagine what an epidemic in the USA would do to their balance of trade. Even worse – the stochastic moment – imagine an unhappy American(s) unleashing something. Gene spliced mice (any university)? Weaponized cockroaches? Simply travelling the USA unleashing releasing common bed bugs into hotels? African bees mating north (a current problem). Or the West Nile Disease?
Follow the money? Follow the bugs?
In my opinion, trade balances are seriously affected by productivity – both positive productivity (good stuff) and negative productivity (bad stuff).
To answer your questions:
And look at where the OECD, the Treasury and the IMF are today. They say that “the IMF would like to sell its gold”. I would suggest : “the member countries want their gold back” – *just my completely unreferenced and completely factless opinion*.
- global trade – it’s a trade war – America is owned by the rulers of populations who hate the American war machine (not Americans).
- the crisis and the recession are not the same – I agree : the crisis is about the crash of assets of the richest gamblers – the recession is about overhang (over-consumption) leading to average people not really needing more than what they have in their attic to keep going for a couple of years.
- small country incentives – they have survived because they really don’t need anything from the richest countries – the rulers of these small countries are the ones who are losing power. It’s a book value issue for the rich.
- the stimulus – My opinion – it’s not a sieve. People will pay down their debts, which creates less liabilities for the banks and improves bank capitalisation. Which the banks can then (effectively) leverage back into the system at “at least” 20:1 on the dollar. If 50% of the stimulus runs back into the banks as “paid down debt” cash – the leveraged liquidity impact is 3.5 trillion. As you might know, that is the missing number in the re-capitalization question. The problem? The USD crashes. Believe it or not – a desired outcome for the normalization of salaries?
- world-wide Keynesian policy – of course the ROW will not buy it. They’ve enjoyed selling to it
Anyway, just the opinions a person who is not an economist. Just a guy who has worked in 8 countries, speaks around 5 or 6 languages and enjoys freedom of speech.
@bsetser – the intro is a bit poetic and this blog post is a couple of days old. Please email me directly (or just put it on this blog post) if you feel that I should improve anything in the the content or style of my comments. I’m doing everything I can (including reading your blog posts and all comments on a blog post) to try and stay on topic.