FYI | Nov 10 2008
By Greg Peel
The great global Keynesian push is on. John Maynard Keynes espoused his theories early in the twentieth century, and among them were the belief in hauling economies out of recession through increased government spending. Keynes was consigned to history after the development of “modern” economics and monetarist theory, one tenet of which is that free markets will always correctly price risk.
Oops.
Sao Paulo – Brazil’s financial centre – played host to the finance ministers of the G20 over the weekend. Together they control 90% of the world economy. No surprise that the general topic of discussion was how to shield and support one’s economy in these difficult times. The new kid on the global economy block – China - jumped in and acted like an old hand, announcing new policy measures on both the fiscal and monetary side of the policy ledger.
The Chinese government will spend US$600bn through to 2010 on measures designed to stimulate its slowing economy. The Chinese economy had been growing at break-neck levels of near 12% prior to the credit crunch and the government had been undertaking measures to slow that growth, including interest rate rises and currency revaluations. It has now fallen back into the 8-9% range, and some economists are predicting a fall below 8%. For China, this is recessive. The country needs 8% economic growth to maintain a level of job creation that supports its vast population.
The stimulus package will be spent on infrastructure, welfare, and other “key” sectors. Infrastructure spend is good news for Australia as it implies further consumption of commodities such as iron ore and base metals. Power infrastructure would further assist the coal and perhaps uranium industries. China runs huge surpluses, so unlike the US it has little qualms in spending such funds.
US president-elect Obama is also determined to provide another stimulus package as soon as he hits the White House next year. Such a package will unlikely be agreed to prior to inauguration given the Republicans are against the idea. The US package will no doubt focus directly on the consumer in the short term, but every day more and more commentators point out that US roads, bridges and other infrastructure are in a dangerous state of disrepair. The US fears job losses, so it will probably not be long before it, too, will be promoting public works.
China’s other measure is to continue with a more easy monetary policy, implying more rate cuts to come. This is also Europe’s solution, with the ECB expected to continue its easing policy ahead. The US has little more room to move on that front.
So the G20 finance ministers are of a collective mind that a combination of monetary policy easing and government spending is what will save the world from depression. After the stock market crash of 1929, the response was to tighten monetary policy and cease public works.
This weekend the leaders of the G20 meet in Washington in what will likely be the first of a long and drawn out serious of discussions about global financial reforms and regulation. Despite the level of hope Obama’s election has brought to the rest of the world, I wouldn’t expect his first move to be capitulation on US financial hegemony. But that’s what others will be pressing for.
