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Krugman: G-20 summit will continue the depression
Howard Richman, 6/28/2010

In his blog entry today, Paul Krugman realized, based upon the results of the G-20 meeting, that the world's governments are not going to run budget deficits to pull the world out of the depression. Here is a selection:

And this third depression will be primarily a failure of policy. Around the world — most recently at last weekend’s deeply discouraging G-20 meeting — governments are obsessing about inflation when the real threat is deflation, preaching the need for belt-tightening when the real problem is inadequate spending.

Krugman has almost figured it out. But he hasn't yet figured out that chronic trade deficit countries cannot afford to run huge budget deficits without risking bankruptcy.

I first identified the current depression in an October 7 2008 blog entry entitled, "A Worldwide Depression Started this Week." I based my conclusion upon the fact that only balanced trade can grow forever; mercantilism eventually bankrupts the trade deficit countries, spoiling the markets for the mercantilist countries.

Eventually, I discovered that John Maynard Keynes had the same theory. He tried to set up a post-World War II institution that would maintain balanced trade in order to avoid depressions like the current one. But instead we got the WTO and the inadequate ideology that even imbalanced free trade is good.

I also noted in October 2008 that the worldwide depression would not end until the mercantilist countries cut their domestic savings in order to balance their trade. I argued that this would not occur voluntarily, because countries don't readily switch away from long-term growth policies that have been working for them.

I also argued, at the time, that the trade-deficit countries, such as the United States, could get out of the worldwide depression simply by balancing trade. That is still true. But at the G-20 summit, President Obama promised (in the communique) not to do anything before 2014. That particular part of the communique reads:

(W)e renew for a further three years, until the end of 2013, our commitment to refrain from raising barriers or imposing new barriers to investment or trade in goods and services, imposing new export restrictions or implementing World Trade Organization (WTO)-inconsistent measures to stimulate exports, and commit to rectify such measures as they arise.

Going into the summit, there was a bipartisan coalition of legislators favoring tariffs to force China to let the yuan rise. President Obama had asked them to wait until after the G-20 summit before taking action. Little did they know that President Obama would undercut them at the summit.

Comment by Mario Fernandez, 6/29/2010:

It would be a better decision to strength the regional trade agreements. The decision to go with the WTO was rushed. USA had to wait until a new generation of production (high sophisticated technology) was widely implemented at least in almost all economic sectors of the USA. These would reduce the international imbalance trade, avoid the structural unemployment, and allow the USA to head the world productivity. I want to highlight three things: new generation of production, structural unemployment, and world productivity.

mariofmora@gmail.com