G-20: the fiscal consolidation

Decisions of the G-20 remain controversial

In brief: G-20 continues to make sweeping statements and to take the paradoxical solutions. The future of the world economy is not in the wrong hands.

The threat of defaults, the second wave of the global financial crisis and the collapse of the American dream are the reasons for a paradoxical decision by the powerful of this world. Was the last summit Big Twenty, held in Canada, a step forward to understanding and cooperation, or back to “his shirt? Paradoxically, but most likely, and those and others. In calling for “fiscal consolidation, does not violate the processes of growth, each offering something for themselves. But overall, this is just what one would prove: the rapid fiscal consolidation at this stage will contribute to growth, not impede it.

And yet, I did not go into detail the results of the summit, and Ask a general question: does this leave us? That’s where me and remembered the old children’s game “to send a packet” (a popular children’s game in the UK). By the rules of the game turn on the music and the participants begin to send each other packages. Once the music stops, the player caught in the moment with the package in his hand, unfolds the paper, under which reveals a new layer of packaging, and the game resumed. Those lucky enough to deploy the last layer of the package, gets wrapped up in her prize and, accordingly, becomes the winner. The adult game of “pass the package is much more difficult: there is just a few games on hand goes a lot of packages. In some – gifts, and in some Cucci – punishment. In these games play better together, as recommended by the International Monetary Fund in its comments to the report entitled “The process of mutual evaluation in Big Twenty”, prepared for the summit. But the advice is easy, but harder to do. For beautiful and correct words, likely to be action, not conducive to cooperation.

So, four games. In the first game of the financial sector: purpose players – to make sure that the bad debts remained in the hands of someone else, but to collect a commission for each layer of packaging, shot in the process. In the second game played against the financiers of the rest of the private sector. Purpose: to sell players from the private sector as much as possible services, but make sure that all the losses suffered buyers. In the third game is played by the same financial sector against the state. The challenge – to make sure that if all other attempts will fail, the losses can throw the state. Then, when the government gives them money, financiers will be able to win by selling securities to those States that they are also bankrupt. In the fourth game play state. The aim – to make sure that the excess supply was a neighbor. Countries with a surplus gain, bankrupt first private and then public sector trading partners. This is called “beggar my neighbor with a sense of duty.” Germany is very good at this.

So what do these games have in common with the great twenty? In short – everything. The first game of toxic assets scattered throughout the financial system. As a result of the second game the private sector was left with huge debts and are now forced to renounce the use of borrowed funds to finance their activities. Third ruined public finances. The fourth led to a crisis and now prevents recovery. Moreover, all games are linked, so you can not change the rules of one without affecting the others. In the Great Twenty understand it, but only to a certain extent. “They have forgotten nothing and learned nothing,” – said Talleyrand of the Bourbons (French politician, Prime Minister of France, the beginning of 19 century). Now the same can be said about politicians. Often, fiscal consolidation is considered in isolation from the context. This is a mistake. Is important not just the national debt as such, and the debt altogether.

This is very clearly written in the annual report of the Bank for International Settlements: it states that the three largest deficit countries – UK, USA and Spain – have tended to be balanced and reliable public debt and completely out-of-control private sector credit. In Spain, for example, public debt is steadily declining. Value of household debt and financial assets also created a false impression of complete well-being. However, when hit by the financial crisis, accompanied by a loud collapse of bubbles, the process of rejection of loans in the private sector and increase lending in the financial sector. All are interrelated: if the private sector fiscal surplus (revenues exceed costs), at the state level must be either a fiscal deficit or surplus of current account (or both, and others). The greater the surplus of the private sector, the greater should be the fiscal deficit or surplus of current accounts at the state level. If fiscal deficits are reduced, then the private sector spends more than earns, or the current account becomes more balanced. Obviously, such results must be achieved not by reducing revenues and increasing costs, especially in the recovery period after the recession.

So how does all this relate to decisions taken in respect of twenty large fiscal policy? In the years preceding the crisis, revenues exceeded expenses in the three groups of countries: some industrialized countries, particularly Germany and Japan, China, which in itself, and some exporters of raw materials. Most markets in developing countries was licking its wounds after the previous crises, and in some developed countries – particularly in the U.S. – was formed in deficit. When the crisis hit, surpluses in countries with surplus fell sharply due to a fall in external demand. Meanwhile, the deficit countries, the demand supported by growing fiscal deficits. Thus, the increase in borrowing on gosuradstvennom level was partially offset by a waiver of loans in the private sector. Now, however, forced tightening of peripheral European countries, and voluntary in other regions leads to fanatical asceticism.

It is believed that such actions inspire people confidence in the reliability of the state and stimulate spending in the private sector. But the refusal of a loan – is a deep and lengthy process, which is characteristic for the economies of emerging from crisis. At this time, suffered a significant part of the world economy, so the negative effects are likely to be really serious. In general, the package of oversupply has moved from surplus countries to deficit countries, the private sector, and then, after the crisis, to their public sector. Assume that they will reduce costs. To package goes further? The answer does not lie on the surface. Perhaps the surpluses will be neutralized by large external deficits of some developing countries, as financial markets stumbled in their quest for the relative financial trustworthiness. Perhaps, these surpluses will result in increased deficits for the good old “Uncle Sam” – is this fear in the U.S.. Maybe surpluses will be reduced, particularly in China. And, maybe, they depreciate in a protracted global recession. Whatever the case may be, one thing is clear. Attempts to eliminate fiscal deficits in isolation from other problems would not work. They will not be reduced without solving the problem of excessive indebtedness of the private sector without addressing external imbalances. We played in the economically dangerous game. To remedy this situation, we need to play into something more constructive.

Ukrainian Globalist
2010-07-05 18:16, Economics.

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