More G-20 Thoughts-This Time From Ambrose Evans-Pritchard

Just when it looked like it might be OK to take a peak outside of the cave along comes Ambrose Evans-Pritchard loosing lightning bolts right and left. Unlike many, he considers the upcoming G-20 event critical.

He recounts the history of a similar meeting in London in 1933 which was a disaster. The United States boycotted the meeting.

By the time world leaders gathered to vent their spleens at the London Economic Conference in June 1933, the Slump had already done its worst. Catastrophic policy errors – tight money – had caused the 1930-31 recession to metastasize into debt deflation. Hitler had been let into government with three cabinet seats, enough to give him the Prussian police and Reich interior ministry. It was all he needed.

Any country that tried to reflate alone was punished by creditors. Most stuck grimly to liquidation. Europe and America undercut each other with beggar-thy-neighbour moves on trade and gold. The surplus countries refused to play their part in restoring demand – just as they refuse today, either because they will not (Germany and the Netherlands, who between them have a surplus of $294 billion) or because they cannot for structural reasons (China, $401 billion).

It was impossible for deficit states to fill the breach, so the system folded on itself. Today, the biggest deficits are: the US ($673 billion), Spain ($155 billion), Italy ($73 billion), France ($57 billion), Greece ($50 billion), Britain ($46 billion). When the Banque de France withdrew gold deposits from New York in October 1931, the US Federal Reserve was forced to raise rates from 1.5 per cent to 3.5 per cent at a terrible moment. It knocked the stuffing out of the US banking system. Needless to say, France was the bigger loser from this petulant act, though that took time to become evident.

Mr. Evans-Pritchard is of the opinion that the worst is not over. He notes that in 1931 soothsayers were spotting green shoots everywhere. He has stated many times in many articles that the only way out is for states to engage in massive fiscal stimulus and he has not spared the EU from withering criticism for failing to do so.

Germany’s finance minister, Peer Steinbruck, is still digging in his heels against “crass Keynesianism”. No matter that his economy will shrink 6-7 per cent this year. Germans must sweat it out: some more than others. Unemployment may reach five million in 2010. No doubt spending is a poor instrument, and we are all sick of bail-outs. But Mr Steinbruck might brush up on history. It was the deflation of 1930-1932 – not the hyperinflation of 1923 – that killed Weimar democracy. (Communists and Nazis won half the Reichstag seats in July 1932). The neo-Marxist Linke Party is already angling for 30 per cent in June’s Thuringia poll.

Here is where I think Mr Evans-Pritchard is at his best. He sees the current economic crisis as serious but  considers the potential it has for unleashing devastating social change the true danger. Though not widely reported, there is considerable social unrest in Europe. So far it has been sporadic but it is not absent. It’s probably not a bad idea to remember what has arisen in the past from economic chaos.

Towards the end of his article, Evans-Pritchardmakes what I consider his best point. I wrote about this a couple of days ago not quite from his angle. He points out that at some point American politicians are going to be boxed in by a public that will not abide more billions of fiscal stimulus that inure to the benefit of other countries. As evidence of that consider the firestorm over the payments to AIG that were forwarded to European banks.

Sooner or later, the public will note that others are not spending their treasure or appear not to be doing so. Though it may be an erroneous conclusion, they will conclude that going further into debt to import steel, machinery or anything from others is a fool’s errand. At that time ”Buy American” will cease to be an unenforced law.

I’m not sure I agree with Mr. Evans-Pritchard contention that we are in as dire a situation as we were when the countries met in 1933. I think that enough has been done to ward off complete collapse. I also think that there is more than a small chance that I could be dead wrong. 

Either way, it might be good insurance for the G-20 to come out strongly for stimulus. If there are green shoots and they continue to grow, they don’t necessarily have to spend what they commit to. Don’t count on that outcome.  

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