Source: Asia Times | By Hossein Askari and Noureddine Krichene*
As the leaders of the Group of 20 (G-20) countries gather in London this week to discuss their latest views on how to get out of the world financial crisis, a damning picture of the progress likely this week emerges from the pledges made by G-20 finance ministers and central bank governors at their own meeting in London on March 14. Then, the promise was that they would act to restore global growth and support lending and reforms to strengthen the global financial system.
Their communique reads: “We have taken decisive, coordinated and comprehensive action to boost demand and jobs, and are prepared to take whatever action is necessary until growth is restored … Fiscal expansion is providing vital support for growth and jobs. Acting together strengthens the impact and the exceptional policy actions announced so far must be implemented without delay. We are committed to deliver the scale of sustained effort necessary to restore growth, and call on the International Monetary Fund to assess the actions taken and the actions required. We will ensure the restoration of growth and long-run fiscal sustainability … Interest rates have been cut aggressively in most countries, and G-20 central banks will maintain expansionary policies as long as needed, using the full range of monetary policy instruments, including unconventional policy instruments, consistent with price stability.”
It would appear that the G-20 finance ministers and central bankers diagnosed the cause of the economic crisis as only a lack of demand and ample energy and food supplies as they have dismissed the role of the energy and food crisis of 2008. Their economic theory was that boosting demand will boost jobs; a great novelty that has not been discovered by poor countries that suffer 30% unemployment and underemployment.
Such theory contradicts classical and neoclassical economics of exchange, production, distribution, and accumulation, and refutes the law of scarcity. If the G-20 finance ministers and central bankers hold the stores of nature and are to create abundance of all imaginable goods costless through fiscal expansion and unconventional money policy, then why worry about job creation? If they can turn stone into bread, why not let humans enjoy unlimited abundance?
What is the finality of work when fiscal expansion and unconventional monetary policy is restoring growth and securing all human wants? Why impose on people disutility of work in such fabulous world of bliss? So please turn on the abundance tap and let us have fun without work!
The G-20 communique is a recipe for chaos. The groups policymakers are wrong in their diagnosis of the current crisis and therefore in the policies they have been and are prescribing. They have simply ignored that major G-20 countries have had imprudent expansionary fiscal and money policies in the last decade and that these same policies have caused financial chaos. They have been oblivious to the risks of conflagrating the present crisis and intensifying exchange rate instability and protectionism.
Contrary to the G-20 diagnosis, the problem with world economy is not only the lack of demand. It suffers from impending stagflation, which means excess money supply and falling real supplies. Stagflation is a state the economy reaches following an episode of fiscal deficits financed by money creation. Some G-20 countries are running record external deficits, indicating excessive demand. For instance, the US external deficit rose from $39 billion in 1993 to $753 billion in 2006. By telling the world that it is suffering from deficient demand, G-20 ministers and central bankers can be seen as telling a village that it has a deficient demand for food when it is plagued by a famine following depletion of all food supplies!
The cause for impending global stagnation was the relentless policy of Federal Reserve chairman Ben Bernanke and his major central bank counterparts who have injected massive money since August 2007, reduced interest rates, pushed energy and food prices to a limit that has disrupted the economy. Bernanke and counterparts had the conviction that aggressive monetary would produce an instantaneous magic and produce an economic boom. Unfortunately, they have pushed world economy into an impending stagflation.
Besides their wrong diagnosis and their failure to recognize the present economic condition, the G-20 charted a dangerous course for destabilizing world economy by unleashing fiscal deficits and printing money – the same policies that brought about stagflation. The way out of this crisis is to restrain fiscal and monetary policies. Certainly, politicians remain adamantly reluctant to any fiscal or money restraint. Hence, the crisis will last as long as government pursue fiscal and money extravagance and resist fiscal and monetary adjustment.
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(*) Hossein Askari is professor of international business and international affairs at George Washington University. Noureddine Krichene is an economist at the International Monetary Fund and a former advisor, Islamic Development Bank, Jeddah.