Opinion: What's another trillion?

Friday 3rd April 2009

If the G-20 was going to create another trillion dollars, I wanted to know how.

With the aid only of an Internet, I decided to find out.
Here, in simplistic terms, is how the world comes up with the dosh for these sorts of deals. Bear in mind that much of the money you are about to read about does not yet and may never really exist.

The process of debt de-leveraging, which is passing through the global economic intestine like a dose of the squits, involves populations assuming the pain created by private sector failure. It's part of the bargain for benefitting when the private sector succeeds.

The rescue du jour is for governments to create money, which many have been doing for some months now, often because there is nowhere else to go when your interest rates reach zero.
When global leaders are placing these latest huge sums in the hands of the International Monetary Fund and World Bank, we must be getting to the end of the available credit lines.
Who would we borrow from next? The Moon perhaps.

The way I think about it, the indigestion of the Greedy Years is now being farted out through the IMF, which will collect US$500 billion extra from a bunch of countries that can "afford" it, as well as creating another US$250 billion in Special Drawing Rights, another highly specific creature of geo-political financial wizardry.

The money is arriving just in time. The IMF was down to its last US$250 billion, and had recently pledged US$64.4 billion in loans to Iceland, Ukraine, Latvia, Hungary and Pakistan. Mexico was looking for a further US$47 billion under the IMF's new Flexible Credit Line, a facility that allows some countries to borrow without conditions.

There is a slew of similar applicants building up from across the emerging world for these funds, which will not always be linked to the IMF's infamous Structural Adjustment Plans, which require countries to stamp out corruption and start living within their means if they are to continue to be helped.
The $250 billion in SDR's can be allocated without requiring economic change from the recipient country.

Unlike the trading banks' over-leveraged debt instruments, this new money is all backed by states, which in the case of many G-20 countries means governments elected by democracies. As a result, what a society can do versus what a market can do is about to be tested.

The socialisation of private debt and failure is at some level a vote of confidence in our collective ability as a species to get ourselves back on track.

But economic rationalist types like me fear that the constructive power of markets may be denied everywhere because of financial market excesses. That would be a terrible outcome. Markets, competition and, by extension, innovation and wealth creation are all getting a bad name at the moment. But they remain vital to realising our human potential.

For those of us who like markets that have good rules, and so are never truly free, and think they are the key to sustainability, this is scary stuff. For example, we're about to try to impose a market system on carbon emissions, also under discussion at global talks in Bonn that are virtually a non-event compared to all the other summits.

Most intriguingly, the IMF, bogey of the left, applier of Rogernomics-style structural adjustment packages, finds itself the steward of what is being described as "the end of the Anglo Saxon model of free markets".

"This is a historic moment when the world came together and said we were wrong to push deregulation," said Nobel Laureate economist and Columbia University professor Joseph Stiglitz, according to Bloomberg.

Perhaps more importantly, this is also a breakpoint in the American dream.

The deals being done in London will weaken the U.S. internationally, reflecting its emerging economic weakness.
Hence the linking of the bail-out to greater power at the IMF for China, India and Brazil, all of whom will be expected to kick the can when the bill is drawn up for the big trillion - an event not anticipated before January next year. Portents of a behind-the-scenes bunfight there.

Japan, the US, and the European Union are already in for US$100 billion each, the Chinese are being coy and may only chip in US$40 billion to US$50 billion. Others are contributing as their means allow. We can only be thankful that NZ is too insignificant to even be at the G-20 or maybe we'd have to heed such a call too.

By Pattrick Smellie, Businesswire.co.nz

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