The one-day extravaganza called the G20 summit meeting ended on April 2 just as most political meetings ended: with a lot of promises, few specifics, and no identification of who will pay.
What is a summit meeting? It is a junket for heads of state. What is a junket? It is a taxpayer-funded trip abroad for Congressmen and their wives — and sometimes without their wives, for the really popular junkets.
One of the astounding things about G20 or G7 summit meetings is that stock market investors briefly believe that the pronouncements of politicians regarding what they intend to do, really want to do, and cross their hearts and hope to die will in fact do, will actually be done.
It is inconceivable to me that investors take seriously the promises of a group of 20 big-time national politicians, accompanied by 10 other nations’ politicians. These people got into office by lying to their constituents, and then convincing their constituents, election after election, to send them back into power so that they can betray them for another round.
One skeptic estimated that, given the amount of time set aside for the official meeting, if every national politician delivered his speech, he would have only 11 minutes to get his ideas across. This assumes that the politicians from the other 10 countries did not get an opportunity to give a speech. If all 30 gave speeches, each one would have had a total of seven minutes to make his sales pitch.
Obviously, the meeting had nothing to do with anything like the give-and-take of a deliberative body. There were no speeches allocated to each member. But, if this had been anything like a deliberative body, the amount of time allocated to the deliberations would not have been sufficient to do more than allow each politician to introduce himself and to make a couple of vague generalities.
At the end of the meeting, a document called the Leader’s Statement was distributed. It is eight pages long. It is obvious that the details of this document were agreed to long before when a committee of bureaucrats sat down and wrote the Leaders’ Statement for them. These proposals were written by higher committees of faceless bureaucrats, sent to other faceless bureaucrats in other nations, were cleared by political advisors, and then were sent to the text-drafting committee.
It is amazing how little of substance there was in this position paper. It said that governments need to strengthen global financial institutions. Then it launched into the question of emerging markets.
Emerging markets and developing countries, which have been the engine of recent world growth, are also now facing challenges which are adding to the current downturn in the global economy. It is imperative for global confidence and economic recovery that capital continues to flow to them. This will require a substantial strengthening of the international financial institutions, particularly the IMF.
This assumes that
the crisis of global financial institutions in some significant way
hinges on a bunch of third-world countries run by various tribal dictators
and socialist planners. It assumes that the Western taxpayers owe
all this money to third-world banana republics. It assumes that the
solution to the worldwide economic crisis is somehow dependent on
the transfer of about a trillion dollars to the tinhorn dictators
who run the banana republics.
The IMF has been doing this for 60 years, and the result has been the same for all 50 years: the bureaucratization of economic production in direct proportion to the amount of money that the IMF has handed over to local political leaders. The late, great economist P. T. Bauer spent his career chronicling foreign aid projects. They were loss-producing from day one.
The paper was somewhat confused as to exactly how much will be allocated to the IMF for which projects. Big numbers appear throughout the paper. The IMF has very few resources of its own. The IMF will be authorized to sell gold, possibly up to $50 billion worth, in order to raise money. The gold market dropped by over $20. Yet it should be obvious to anyone who understands the central banks that most or all the IMF’s gold will be bought by the central banks. The general public will see none of it.
I am not one to say that $1 trillion is not a lot of money. However, this worldwide economic recession destroyed approximately $50 trillion of capital in 2008 alone.
I fail to see how an additional trillion dollars to be distributed to third-world countries by the International Monetary Fund is going to make any significant difference.
Taxpayers from the member nations will wind up paying for hundreds of billions of dollars of this grant of money. In other words, all of this is going to come about either through increased taxation on the member countries’ voters, or through increased debt that will be sold to IMF investors. All of the money that investors put into IMF bonds will not go into the private sector. Every dime of this money is going to be misallocated. This is the heart, mind, and soul of Keynesian economics: the government’s allocation of funds to favored nations, industries, and power blocs. This is how the Keynesian believes that we can restore economic growth.
France and Germany refused to pony up any more bailout money. According to agreements already reached, a total of $5 trillion will be spent by the various nations on their own domestic boondoggles. The position paper insisted that this will raise output by 4% by the end of 2010. How, it did not say.
It will also make possible the transition to a green economy. There was no definition of what a green economy is, or what it ought to be. But the position paper threw this sop to the environmentalists.
The position paper stated the following: taken together, “These actions will constitute the largest fiscal and monetary stimulus and the most comprehensive support program for the financial sector work in modern times.” Bailouts R Us!
Then the position paper sketched a lot of hopes and dreams. Nothing was said about how any of these hopes and dreams will be achieved.
One hope is that the tax havens of the world will somehow be persuaded not to function as tax havens anymore. Nothing was said as to exactly how this will be achieved.
There will be increased international financial regulation. There will be new international standards for accounting. As to who is going to do this, and how it is going to be achieved, and who was going to implement it, and what sanctions are going to be imposed, the paper is silent.
International regulation is going to impose new principles on executive pay and compensation.
There are going to be new regulations on “systemically important hedge funds.”
There is going to be a new system of regulation to prevent excessive leverage.
In other words, the position paper promised that the barn door will be locked tightly, now that the horses have disappeared into the night.
There was one dark but small cloud in the horizon of the leaders. “We are result to ensure long-term fiscal sustainability and price stability and will put in place credible exit strategies from the measures that need to be taken now to support the financial sector and restore global demand.” This is interesting language. It acknowledges that there is risk associated with the overall plan that has been announced. There is no statement as to exactly what this risk is. But this risk is sufficient so that the new world order of finance has got to have in place some exit strategies. These exit strategies must be credible. It did not mention any.
We read the following: “We are convinced that by implementing our agreed policies we will limit the longer-term costs to our economies, thereby reducing the scale of the fiscal consolidation necessary over the longer term.” What exactly are these people talking about? Are they talking about gigantic national deficits? I think so. How are these gigantic national deficits going to be reversed? The position paper did not say. When will these policies be reversed? The position paper did not say.
So, when it is all said and done, the meeting produced this laundry list of fashionable political promises. New agencies will be set up to go after rich bankers. Hedge funds will be regulated. There will be a closing of tax havens. There will be $1 trillion for banana republic dictators. They promised not to increase tariffs and other restrictions. They promised not to devalue their currencies. But, in the last six months, 17 of the 20 member states have increased restrictions on trade.
All this will be done as a means of producing a green economy. As to who will pay for any of this, the position paper is silent.
In response to this laundry list of political promises, stock markets around the world increased by 2 to 4%. This indicates that stock market investors are committed to the political salvation that Keynesianism promises. They are committed to the idea that taxation, monetary inflation, regulation, and foreign aid to banana republics will heal the world of its $50 trillion losses, and lead to a Green Nirvana.
This means, in the immortal words that were never uttered by P. T. Barnum, “there’ a sucker born every minute.” Of course, the Keynesian suckers are not born every minute. But every June several million of them graduate from American universities, where they were trained by Keynesian economists and social scientists to believe that government spending and government regulation are the source of long-term economic growth. The suckers are not born every minute. The suckers are sent to college by their parents, who go into debt anywhere from $40,000 to $200,000, in order that their children might be trained in the logic of Keynesian economics.
The fundamental practical question of all economics is this one: “Who wins and who pays?” This is also the fundamental question of all politics. Keynesian economists create sophisticated mathematical models to keep students from finding a clear answer to these two crucial questions.
The Keynesians’ goal is to train students to believe that money spent by the government is productive, while money spent by investors and capitalist enterprises is wasteful. They teach the students to believe that the expansion of money by the central bank is productive, while increased savings by the public leads to what the Keynesians call the paradox of thrift. Somehow, thrift creates economic recessions. Somehow, increased saving to make available capital goods is a threat to the financial stability of free markets.
Keynesians want the government to spend so that the economy will continue to flourish. This is widely believed, and the increase in stock markets around the world in response to the press release by the G20 Summit Meeting is indicative of just how widely this faith is believed.
The trouble is, the theory is wrongheaded. The source of productivity is creativity that is financed by voluntary saving. It is possible to have creative ideas that never flourish, because these ideas never receive funding from investors. It is also possible to have investments that go sour because the investments rested on false premises. But in the long run, voluntary thrift, meaning a reduction of current consumption, is the most important technical factor in any economy that experiences long-term economic growth.
Without voluntary thrift, it is impossible to sustain economic growth. Without the tools of production, production falters. Tools must be replaced, and new and better tools must be financed. The only way to do this profitably is through voluntary thrift. Otherwise, government bureaucrats will squander tax funds and borrowed funds and inflated funds on projects run by other bureaucrats.
Rule by bureaucrats is what the IMF is all about. This is all that it has ever been about. Yet the heart of the press release (Leaders’ Statement) is the promise that there will be a restoration of economic growth based on about $1 trillion worth of IMF boondoggle money and $5 trillion in domestic government spending. Investors believed the press release.
DOING WHATEVER IS NECESSARY
Repeatedly in the document, we are told that the governments will do “whatever is necessary” to reestablish economic growth.
We have today therefore pledged to do whatever is necessary to restore confidence, growth, and jobs;
repair the financial system to restore lending;
strengthen financial regulation to rebuild trust;
fund and reform our international financial institutions to overcome this crisis and prevent future ones;
promote global trade and investment and reject protectionism, to underpin prosperity; and
build an inclusive, green, and sustainable recovery. . . .
We are committed to deliver the scale of sustained fiscal effort necessary to restore growth. . . .
We are committed to take all necessary actions to restore the normal flow of credit through the financial system and ensure the soundness of systemically important institutions, implementing our policies in line with the agreed G20 framework for restoring lending and repairing the financial sector. . . .
We commit today to taking whatever action is necessary to secure that outcome, and we call on the IMF to assess regularly the actions taken and the global actions required. . . .
I regard this as not so much a promise as a threat. They really will do everything necessary to reestablish economic growth. The problem is this: the policies that governments adopt to establish economic growth will reduce economic growth. They transfer assets from the private capital markets to the markets for government debt. Then the money is spent by one set of government bureaucrats to fund the projects of another group of bureaucrats. There is no profit and loss system to assure the planners that they are in fact meeting the needs of consumers. The money meets the needs of incumbent politicians. Why this should lead to economic growth is a mystery, but Keynesian economics teaches that it will.
We are seeing the destruction of capital on a massive international basis. We have already seen the loss of something in the range of $50 trillion of investment capital. It is not clear that the trillion dollar spent by the IMF will significantly harm the international economy. In terms of the size of the international economy, this money is chump change.
Why anyone would believe that this piddling amount of money will in some way restore economic growth to what the position paper calls the worst crisis in modern times is a mystery to me. But investors believe the press release.
I suggest that you don’t believe it.