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The world economy received a major boost in the shape of a $1.1 trillion pledge to the international community yesterday. The rescue package was given a warm reaction by most who believe the G20 member, who met in London, have put in place measures that will “stop the rot”.
While Alistair Darling, Chancellor, warned “thing will not be fixed overnight”, there was a very real sense among the 20 leaders that the global economy has turned a corner and the gloom of recession is evaporating.
Stock markets reacted immediately to the news that the big twenty had promised to plough $750 billion into the International Monetary Fund (IMF) sending stocks into new highs around the soared. The IMF will give emerging nations access to $250 billion of emergency reserves as well as an extra $250 billion in credit for trade finance.
Gordon Brown, who hosted the London summit, said: “This is the day that the world came together to fight back against the global recession.”
The Prime Minister and President Obama played an instrumental role in convincing other G20 members to increase the resources available to the IMF, which helps countries that get into difficulties. The IMF is to receive $750bn into their coffers for the purpose of lending money to struggling nations as and when they determine.
It is also contributing $250bn to help counteract the contraction of global trade and fight protectionism.
G20 members also agreed on new measures that will regulate financial institutions and promote transparency, especially in tax havens, which up until now have not disclosed information.
It may sound like a lot of new money, but the reality is much of the $1.1 trillion is already circulating in existing programmes and tied up in export guarantees in wealthy countries, with just $50bn available to poorer nations.
However, the pledge of $250bn in free money from the IMF is a surprising new development, but just $19bn will be made available to the poor countries.
Greater transparency for tax havens and more stringent regulations will cheer a lot of people but Luxembourg has already been told they will not be affected by the new measures. Pay caps and codes of practice are undoubtedly a good thing, but it’s a case of bolting the barn door after the horse has bolted - at least until the next crisis.
The downturn in the world economy is gaining speed so the cash injection given to the IMF won’t be enough to pull us out of recession. Plus, only some of the money given to the IMF will be lent out, and importantly it will have to be repaid with interest.
In the past interest has been as high as 30%, which makes it impossible for developing nations to repay it and prosper at the same time. When they default on mortgages, many countries have had to relinquish control of their natural resources.
The reality is the banking system is broken. Obama asked us to picture the banking system in hospital where it is receiving care but it seems they are rubbing salt into the wounds. Banks are asking us to borrow, when we really need to save and the US government is asking the world’s nations to lend them money, when really they would be forgiven for running a mile.
It is interesting to see how far countries will go in continuing fiscal stimulus programmes. Gordon Brown for one has said that Britain’s stimulus initiative would total $5 trillion by next year.
Gordon Brown has been using the term “new world order” in many speeches since he became Prime Minister and yesterday’s stimulus package was another opportunity to remind everyone that the world is heading towards a global currency.
The G20 did not, however, discuss a one world currency at this meeting but with China asserting pressure for its introduction it won’t be off the agenda for long.
Especially as China continues dominate production exports to the USA and Britain, where the currencies are faltering.
Nor was the subject of global imbalances mentioned, such as the need for China to spend more and the US to save more. In fact, the US seems set to continue its spending spree by printing more money, give more bailouts and encouraging its consumers to buy cars.
Peter Schiff, the American economist who is nearing legendary status after his accurate predictions from as far back as 2004, said “The government should be encouraging us to save, not spend. Asking us to buy cars when we fear losing our jobs is like asking us to put swimming pools in our yard”.
