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G-20 Foreign Ministers give up on stimulus spending
Howard Richman, 6/6/2010

On Saturday June 5, the G-20 Finance Ministers gave up on their failed plan to exit the Great Recession with stimulus spending. The following is an excerpt from the Reuters analysis by Alan Wheatley (Analysis: G20 doesn't even try to put brave face on debt mess):

South Korea (Reuters) - Finance ministers can usually be relied upon to put the best spin on whatever is happening to the global economy.

Not at this weekend's Group of 20 meeting in Busan....

With Europe signing up for austerity, it is no wonder that pessimists such as U.S. economist Nouriel Roubini see the euro zone heading for stagnation if not recession.

And in the absence of a burst in private sector demand in current account surplus countries such as Germany and China, global economic imbalances could deteriorate again -- especially if a resurgent dollar undercuts the revival in U.S. exports....

US Treasury Secretary Geithner is the only finance minister who hasn't given up on the idea of new stimulus spending. But the trade-surplus governments are all rejecting his request that they spend more. Wheatley reports:

Japan elected a new prime minister, Naoto Kan, who is a fiscal conservative and has floated the idea of raising the national sales tax.

China reaffirmed its current policy stance, giving no hint that it was ready to stoke domestic demand by letting the yuan rise.

And Germany gave short shrift to the view, shared by the IMF, that growth would take a hit in the short term if rich economies cut their budget deficits without adjustments by emerging economies to reduce their reliance on exports.

Despite Geithner's wishful thinking, it is becoming clear that the world's trade surplus countries will not move to boost their imports on their own, just as I predicted in my October 7 2008 Trade and Taxes Blog entry:

In February, Nouriel Roubini predicted the financial crisis that the world is now going through. We are now in the twelfth stage of what he predicted. Follow the following link if you want to read his predictions: http://media.rgemonitor.com/papers/0/12_steps_NR.

But Roubini is not the only one whose predictions are coming true at the moment. Richard Duncan’s predictions from his 2003 book (which he revised in 2005), The Dollar Crisis: Causes Consequences and Cures warned that the global imbalances would cause a great depression that would be the biggest economic story of the 21st century.

He argued that global aggregate supply is beginning to outrun global aggregate demand as the countries pursuing export-oriented growth are producing more and more goods without a corresponding increase in income among worldwide consumers. In other words, the excess of savings over investment in the export-oriented countries will drive the world economy into a depression. Eventually, he predicted, US consumers will not be able to borrow more for consumption. Like other debtors they will be forced to pullback, causing the depression.

Roubini’s ideas and Duncan’s ideas do not conflict. In fact they coallesce around the same idea: the American consumer can no longer afford to pile on debt.

The worldwide depression would just be a temporary recession if the countries that are currently pursuing export-oriented strategies were to stimulate their own economies in order to reduce their own people's savings and reduce their own trade surpluses.

Unfortunately, this will not happen. Countries do not switch away from economic policies that have been working for them....

The obvious solution to a persistent crisis caused by trade imbalances is to balance trade. Since the trade surplus countries won't act, the trade deficit countries will have to do so. The United States could lead the way by instituting a tariff, proportional to our bilateral trade deficits, on all of those countries with whom we are running trade deficits that are 10% higher than our exports. The rate of the tariff could be adjusted quarterly by dividing the amount that we import from each by the amount that we export to each.

The trade-surplus countries could reduce our tariff rate by taking steps to import more from us. In 2009, the Chinese government only let its people import 28% of what China exported to us. The Chinese government could reduce our tariff rate by letting the yuan rise, by allowing the import of our copyrighted materials while prosecuting their piracy, and by taking down its many tariff and non-tariff barriers to our products.

Basically, President Obama would be repeating President Nixon's 1971 invocation of the special WTO rule for trade deficit countries. Our economic success would lead other trade deficit countries to follow suit. The result would eventually be world-wide balanced trade, which is sustainable. Trade deficits eventually bankrupt the trade deficit countries. Balanced trade can grow forever.