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G20 economic crisis

Clueless in Shanghai

The G20 meeting in Shanghai has started with a round of finger pointing as it becomes clear that the policies put in place in the wake of the 2008 banking crash have failed to deliver the promised global economic growth.

With the International Monetary Fund sounding alarm bells about the drop in demand in the Western economies and the growing crisis in China, world finance leaders are being urged to enter into yet another round of debt-based stimulus.  But finance ministers are beginning to question the wisdom of doing the same thing over and over in the hope that things will turn out differently.

The voice of Germany’s finance minister Wolfgang Schäuble has been the loudest:

“The debt-financed growth model has reached its limits, we therefore do not agree with a G20 fiscal package as some argue… There are no short-cuts that aren’t reforms.”

Germany is not alone in objecting to a further stimulus package.  French finance minister Michel Sapin has made clear that France is simply not in a position to participate in further easing; a position likely to be shared by most other EU members.

The alternatives, however, may be worse.  Bank of England Governor Mark Carney used his speech at the G20 to attack the slide toward negative interest rates, which began with Japan, and looks set to be followed by the European Bank.  As Carney points out, introducing negative interest rates does not mean that ordinary people are going to be paid to take out loans.  Rather, the objective of negative interest rates is to lower the value of a currency on international markets – effectively an attempt to pass national economic crises onto someone else.

The risk of negative interest rates is that countries get caught in a race-to-the-bottom currency war.  But the only alternative within the neoclassical economics paradigm is more of the failed (government) debt-based stimulus in economies where governments, companies and households are already struggling under the weight of historically high mountains of debt.

What ministers and central bankers are beginning to wake up to is that trillions of dollars, euros, pounds and yens of public and private debts are – one way or another – going to get written off.  And once that fact becomes public knowledge, the international fiat currency system that has been in place since 1971 will come to an abrupt end.

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