The G-20 Growth Strategy: Self-Flagellation, Prayers and Threats
The media and pundits parsed Mark Carney’s speech today to the Ottawa Economics Association (OEA) every which way to Sunday today and concluded that Carney had effectively signaled the Bank’s intention to raise its target for the overnight interest rate sooner rather than later.
But in all the hand wringing about the inevitability of rate hikes (do people ignore Japan on purpose? — just asking) and their consequences for debt of all kinds, everyone seemed to miss the most important message in Carney’s speech: China got us into this mess (by “financing” US deficits and presumably allowing rates to fall below some sort of Wicksellium natural rate — never mind the role of institutions like Goldman Sachs, control frauds, and all the other untoward activities of the financial sector) and only China can get us out:Â the G-20 economies are doomed unless China allows the Yuan to float and generally starts buying our stuff.
To make the case, Carney outlined three scenarios.
- Business as usual scenario (1): Governments run deficits that “crowd out” private investment and generate unsustainable government balances. China continues to “artificially” peg the yuan and finance the US deficit.Â We find ourselves however back in a crisis situation similar to 2007-08. Growth is modest.
- Fiscal Consolidation scenario (2): G-20 countries “consolidate” their fiscal balances but China refuses to allow the Yuan to float and continues to generate large trade and current account surpluses.Â Growth is very weak and we find ourselves in a deflationary environment.
- G-20 “Framework” Scenario (3): G-20 countries “consolidate” their fiscal balances and China allows its currency to float.Â Chinese buy more of our stuff instead of hoarding savings. Global demand is rebalanced.Â Smiles around because of the “Pareto improving” nature of this brilliant plan. Growth is strong.
Call me crazy but this is insane.Â The G-20 Framework scenario — which is the one our leaders appear to have bought into — is essentially the Fiscal Consolidation scenario (i.e., no 2) plus a prayer augmented by a threat (more on that in a moment).
If the fervent G-20 prayers aren’t answered and China does what it has done for the last 20+ years, the Bank of Canada’s analysis suggests that the global economy will be about 5% smaller by 2015 than it would have been under the “Business as Usual Scenario” (and about 10% smaller than under the very optimistic G-20 Framework Scenario).
Setting aside incantations to higher powers, for all intents and purposes, the G-20 “framework” scenario amounts to the following threat built on the edifice of fealty to the gods of balanced budgets: revalue your currency China and buy our stuff or we’ll destroy the global economy by pursuing fiscal consolidation.(ADDENDUM: I see the EU nations are well on their way to delivering on their end of the bargain…way to go Europe! That’ll teach them Chinese).
That is some warped logic my friends but such is the state of the economics profession which, far from learning anything from the financial crisis, seems to have dug in its heels and reverted to type: deficits are bad, governments must shrink, markets are best, and you, sadly, know the rest.