Even as they plan the meeting, the G8 seem to have run out of steam. There are suggestions that enough has been done to defend globalisation and steer the global economy back to stability. The remedies considered adequate are: unfettered capital mobility (with limited regulation); inflation targeting; substantial bail-outs of the finance sector; the bolstering of the IMF and its policies: free trade in the face of global trade imbalances, and partial, if inadequate, fiscal stimuli.
In other words, the tried-and-failed policies that prolonged the Great Depression and that will inevitably fail again.
It is painful to watch. As banks become insolvent, G8 governments recklessly invest billions in taxpayer funds to prop them up, while refusing to dislodge incompetent managements. Martin Wolf in the Financial Times suggests that governments like that of the US administration seem to want “to convince ordinary Americans that their government is a racket run for the benefit of Wall Street”?
As countries such as Ukraine are bankrupted, G8 leaders strengthen the IMF and its failed, 19th-century austerity economics. Is this because they want to return Ukraine to the Russian fold?
As trade deficits rise and currencies fall, G8 leaders strive hard to leave imbalances to be unwound by “the invisible hand”. Don’t they worry about the uncontrollable reaction of protectionism, nationalism and trade wars?
As borrowing costs remain stubbornly high, central bankers such as Mervyn King and Claude Trichet fail in their duty to act decisively to lower bond yields and interest rates. They appear less concerned about the catastrophe of rising bankruptcies and unemployment, than about fiscal deficits that will be corrected by economic recovery, and by non-existent inflation.
As the private sector stops spending, some G8 governments decline to step in to fill the vacuum. Is this because, like Britain’s Conservative party, they are still obsessed with 19th-century economics? Or do they wish their economies to collapse?
This much is clear. G8 leaders and their advisers have not learnt the lessons of the Great Depression: namely that in a debt-deflationary crisis, governments and central banks must intervene first, to lower borrowing costs and ease the colossal burden of debt on companies and households. Second, governments must intervene and spend to compensate for the private sector’s failure to do so. They must intervene to restore confidence, revive the private sector and create jobs.
When the economy recovers governments will recoup taxpayer losses – as sure as night follows day.
However such policies cannot be implemented within a framework of international capital mobility – the centrepiece of globalisation.
John Maynard Keynes at the height of the Great Depression offered a way forward – in his brilliant essay National Self-Sufficiency (June 1933). In it he seeded the localisation theory of today’s “new economics”: that all goods and services, including finance, that can reasonably be provided locally should be. It is an essay that provides a sound basis for economic recovery and environmental stability.
But these ideas can only be implemented within a new framework: one that encourages co-operation, not competition, between nation states. One that restores autonomy to governments – or groups of governments – to work together to manage the interests of their people and their share of the ecosystem. Such a framework is fundamental to international co-operation and stability, but also to the maintenance of democracy.
Central to domestic management of the economy was Keynes’s proposal for capital controls, so that governments could manage the most important levers of the economy: interest rates and exchange rates, and use these to stabilise a collapsing economy – and international imbalances.
Next he proposed an International Clearing Union – a global central bank that would clear cheques between trading nations, and would set up a framework of variable exchange rates, protected from speculators. Its remit would be to discourage both huge national “overdrafts” and surpluses. The bank would be independent of any national interest. It would issue a currency – an international reserve currency – much along the lines proposed by Zhou Xiaochuan, governor of the Central Bank of China this week.
But Keynes’s ideas are anathema to ideologues in G8 Treasuries – and to the finance sector, who are in a desperate race to prop up the collapsing architecture of globalisation. As they remain dominant, the “masters of the universe” will prevail, and the G20 summit, I confidently predict, will fail.