Commentary

The World According to Gordon Brown

It was all smiles at the conclusion of the G20 summit held in London yesterday. British Prime Minister Gordon Brown babbled on about the emergence of a new world order – which will be composed of the very same self-serving politicians that he was bickering with just a few hours before this laughable announcement of a new age of hand-holding and global harmony. This new era of cooperation among rivals will spruce up troubled banks and subject them to stringent regulations, lift millions of wretched souls from poverty, energize the world’s economies, and revive international trade. Unfortunately, differences over how to coordinate the fight against the global slowdown and the rising tide of protectionism, and of course, what to do with the trillions of dollars in toxic assets clogging the banking systems in America and Europe were not adequately addressed.

But Gordon Brown decided to accentuate the positive. With extreme pride and self-confidence, he told the eager crowd of media shills all about the G-20 nations’ heroic efforts to date. Brown let it be known that world leaders are in the process of administering an enormous global fiscal stimulus, one that will reach the $5 trillion mark by the end of 2010. Another $1 trillion will be made available to economies in dire need of aid through the International Monetary Fund (I.M.F.) and the World Bank. And, the G-20 approved $250 billion in financing to stimulate international trade. (Smashing, Gordon, simply smashing!)

Meanwhile, the deep rift, with America, the U.K. and Japan on the one side, and France and Germany on the other, about how to lift the global economy out of its steepest recession since the 1930s remained. The Americans, British and Japanese are championing even greater fiscal and monetary expansion – deficits be damned. Meanwhile, France and Germany are advocating a wait and see approach as far as fiscal stimulus is concerned. (With regard to financial regulation, both the French and Germans want to serve up a steeper overhaul than the Americans and British can digest.)

The reasons for the latest trans-Atlantic rift between the largest continental European powers and the axis of consumption (America and the U.K.) – plus Japan – lies in the social safety nets that each nation provides its citizens in times of economic misery. Both France and Germany have much broader social safety nets than their Anglo-Saxon – and Japanese – counterparts. Therefore, they believe it is unnecessary to boost government spending any further than they already have in order to revive their economies. In addition, both countries are concerned that exorbitant government spending will drastically increase their budget deficits, and are willing to exhibit patience, and see how the initial round of fiscal stimulus affects demand in the months ahead.

The U.S., U.K. and Japan, are quite eager to boost global demand through additional fiscal and monetary stimulus. They do not want to wait and see what the results will be from efforts put forth to date. Japan staggered through a decade and a half of anemic growth after twin asset bubbles, in property and shares, collapsed in the early 1990s (the Nikkei actually peaked in 1989). The Japanese government was slow and ineffective in dealing with the enormous amount of bad debt, now referred to as toxic assets, that rotted away on the balance sheets of its major banks. (Japanese politicians also made the mistake of raising taxes before consumption growth could take hold.) In the end, they wasted trillions of yen building bridges to nowhere in rural alcoves home to the governing party’s main supporters, while they dithered over how to confront the elephant in the room – mountains of souring real estate and business loans clogging their financial system.

American politicians – with President Obama leading the chorus – have criticized Japan’s ham-fisted response to its banking crisis. America’s ruling elites have vowed to be proactive, launching aggressive economic stimulus packages and expanding the financial bailout of America’s largest banks, insurers and auto companies.

Apparently, Japan’s woes of the 1990s and America’s current battle with financial calamity are not enough to change European attitudes toward rescuing the global economy from recession. Economists who advise German Chancellor Angela Merkel are warning that foreign governments – meaning America, the U.K. and Japan – could consider inflation as a way to reduce debt burdens. A few weeks ago, Klaus Zimmerman, president of DIW Economic Institute in Berlin, was quoted in the Financial Times saying that American and British central banks were “literally printing money,” creating an inflationary potential that is hard to stop. (Fiscal and monetary stimulus expand money supply, which feeds Inflation. An artificially large amount of money in the economy chases a relatively finite supply of goods and services, thus raising prices. It also reduces future debt burdens by depreciating the value of money.)

So, the battle lines are being drawn between the nations with large debts and weak social safety nets, and those who operated in a more frugal manner, while offering their citizens more protection for extended periods of economic hardship.

As Gordon Brown thundered on about battling the world’s shadow banking system while vowing to fight poverty wherever it may exist, the real issues, such as cleaning up toxic assets festering in the global banking system – mainly in the U.S. and the U.K. – and the creeping protectionism being legislated by the world’s largest economies in the name of saving domestic jobs, have yet to be tackled in a serious manner. (The Washington Post noted that a pledge to fight protectionism was made in November, only to be ignored by 17 nations once politicians went home and bowed to various domestic constituencies.)

In order to fix what is broken in the global economy, cooperation and realignment will be necessary. Governments will have to strike a balance when stimulating economic growth so that they do not ignite inflation – which will reward the reckless at the expense of those who acted prudently. (I believe it is more important to pare down debt and restore confidence in the financial system than to spend wildly in the hope of stimulating demand – read my commentary on the matter.) The end of the global credit boom caused the bursting of massive asset bubbles in America and the U.K. Both nations spent well beyond their means, but they were aided and abetted by nations like Germany – and of course, China – that relied on exports to feed economic growth. This means that G-20 leaders will have to encourage their nations to change old habits for the good of the global economy. Politicians in every nation will also have to fight back against populist solutions that raise trade barriers in the vain hope of saving jobs in uncompetitive, yet politically savvy industries. I realize that this is a tall order for a class of politicians that is both bereft of originality and utterly lacking in resolve, but it is the only way to fix this mess.

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