Sat Nov 5th, 2011 at 04:49:55 AM EST
Consider the following account of the Bretton Woods summit towards the end of WWII:
When Keynes began to explain his idea, in papers published in 1942 and 1943, it detonated in the minds of all who read it. The British economist Lionel Robbins reported that "it would be difficult to exaggerate the electrifying effect on thought throughout the whole relevant apparatus of government ... nothing so imaginative and so ambitious had ever been discussed"(5). Economists all over the world saw that Keynes had cracked it. As the Allies prepared for the Bretton Woods conference, Britain adopted Keynes's solution as its official negotiating position.
But there was one country - at the time the world's biggest creditor - in which his proposal was less welcome. The head of the US delegation at Bretton Woods, Harry Dexter White, responded to Lord Keynes's idea thus: "We have been perfectly adamant on that point. We have taken the position of absolutely no"(6). Instead he proposed an International Stabilisation Fund, which would place the entire burden of maintaining the balance of trade on the deficit nations. It would place no limits on the surplus that successful exporters could accumulate. He also suggested an International Bank for Reconstruction and Development, which would provide capital for economic reconstruction after the war. White, backed by the financial clout of the US Treasury, prevailed. The International Stabilisation Fund became the International Monetary Fund. The International Bank for Reconstruction and Development remains the principal lending arm of the World Bank.
The consequences, especially for the poorest indebted countries, have been catastrophic. Acting on behalf of the rich world, imposing conditions which no free country would tolerate, the IMF has bled them dry. As Joseph Stiglitz has shown, the Fund compounds existing economic crises and creates crises where none existed before. It has destabilised exchange rates, exacerbated balance of payments problems, forced countries into debt and recession, wrecked public services and destroyed the jobs and incomes of tens of millions of people(7).
(Clearing Up This Mess
, George Monbiot, November 18, 2008)
But the US didn't do just this. After flirting for some time with plans to deindustrialize Germany in order to turn it into an agrarian backwater, the US settled on a massive programme of industrialization of Germany, the Marshall plan. They could just as well have said "we'll keep our surplus and you pull yourself up by your bootstraps", but they didn't. And an important part of the reason why they did it is that the people in charge of American economic planning (including Harry Dexter White) had recent memory of the Great Depression.
The problem that Keynes was attempting to solve is the tendency of trade balances to grow more lopsided with time, leading to macroeconomic instability. The solution is the introduction of penalties on net exporters (being a net importer carries inherent penalties already in the form of interest payments on the debt accrued to finance the trade balances, and occasional devaluation crises). The political difficulty is that, until a crisis hits, there is no incentive to do anything; and, after the crisis hits, the exporter of last resort has everyone else over a barrel, and even feels righteous about it.
So, the story of Bretton Woods has been repeating itself since the end of 2008, when political leaders were shocked out of their complacency about the Global Financial Crisis. Despite lofty declarations of intentions by world leaders at the preparatory G20 summit late in 2008, at the inaugural G20 meeting in London in the Spring of 2009 the European Union, led by Germany, rebuffed American attempts to agree a global fiscal stimulus package on the argument that Europe's more generous "automatic stabilizers" rendered an ad-hoc stimulus unnecessary. Later in 2009, there was another G20 summit where
Leaders of the world's biggest economies papered over their differences at the G20 today with agreement to develop new guidelines to prevent so-called "currency wars".
The deal falls well short of the 4% limit on national trade deficits and surpluses proposed by US President Barack Obama, which was blocked by exporting countries China and Germany.
The problem of trade imbalances, which has seen countries like China build up massive reserves on the back of booming export industries while the high-consuming West has become mired in debt, "was never going to be solved overnight", said Mr Cameron.
[UK], 12 November 2010)
Now, according to twitter accounts, at this week's G20 summit in Cannes German Chancellor Angela Merkel undermined efforts to address the ongoing Global Financial Crisis, even leaving the summit early: @paulmasonnews
Hearing that Merkel nixed the plan for the IMF to issue SDRs (ie print money) then left. Hence Sarko + Cam facial expressions like doom
The proposal at hand was for the IMF to issue Special Drawing Rights
(the IMF's and World Bank's unit of account) in order to fund the European Union's efforts to contain its debt crisis, which reportedly Merkel refused.
Two people familiar with the matter said the SDR issue could total $250 billion. One option under discussion is to use some of that money to beef up the European Financial Stability Facility, the euro zone's bailout fund.
The SDRs would be held on central bank balance sheets.
Holding the SDRs would help assure investors that a country such as Italy, for example, had an extra pool of reserves it can tap in an emergency. That should help to push borrowing costs down for the country.
(Special IMF Money Considered
, WSJ, 4 November)
As I quipped yesterday in reaction to that, Merkel's position must have been
Of course not.
Issuing SDRs would be inflationary. It would mean that the world as a whole would be living beyond its means, and we have to end that once and for all. The solution is global fiscal consolidation. As in 2009, automatic stabilizers (always respecting the constitutional debt and deficit limits) will suffice. The world as a whole must become a competitive net exporter, like China and Germany.
Let nobody say that Merkel didn't bring her economics lessons well memorised.