What good will come out of the G20 summit?

November 13th, 2008

Share |

This coming weekend, leaders of many nations will gather together for a G20 summit to discuss longer-term solutions for the global economic crisis. This summit will involve not just involve the ‘rich’ and mostly Western economies, but also emerging economies like China. As the British PM said here,

The alliance between Britain and the US – and more broadly between Europe and the US – can and must provide leadership, not in order to make the rules ourselves, but to lead the global effort to build a stronger and more just international order.

There is plenty of rhetoric about the formation of a coming “new world order” from the G20 summit. But all these are just big talks and hot air.

Firstly, the world’s biggest economy (US) is in no position to lead. The US is the world’s biggest debtor nation who borrowed from the world’s biggest credit nation (China). As we said before in Will the US dollar collapse?,

Thus, this situation is akin to an individual owning the bank money. If he owes the bank a million dollars, he is in trouble. But if he owes the bank a billion dollars, the bank is in trouble?if he goes bankrupt, a large portion of bank?s loan portfolio will be wiped out, rendering the bank insolvent. The US owes the rest of the world so much money that they cannot afford to let the US go ?bankrupt.? But the rest of the world knows that sooner or later, the US will go ?bankrupt.?

Obviously, the debtor is in no position to be the boss. That’s why Gordon Brown’s empty talk about US and Europe providing leadership is a joke.

Secondly, although it is possible that the G20 summit will produce some substantial and coordinated actions from governments, it will be nothing close to a “new world order.” This is because it is all about trying to return to the status quo of fiat money, credit expansion and most importantly, maintaining the US dollar as the world’s reserve currency. As we explained in Awash with cash?what to do with it?

The US, being in the enviable position of having its money as the world?s primary reserve currency, is not subjected (for now) to the same rules as the other countries?it can spend more than it earns simply by printing its own dollars to pay foreigners.

There is no way the US will let their dollar relinquish its reserve currency status without a fight. Even if they are willing to do so, what will be the alternative? Gold? Not likely because this will be too tough a medicine for any nation to take. As we explained in Can there be an alternative reserve currency?,

All these problems leave only one candidate to function as the world?s reserve currency- gold. The world used gold under the classical gold standard (there is a brief history of money in Why should you invest in gold?) and it arguably worked very well until the interruption of the First World War. But it will require the global economic situation to deteriorate to the point of extreme pain for the idea of reverting to the gold standard to be entertained. So, don?t hold your breath on that.

So, at the end of the weekend, the G20 summit will most likely be another lame-duck session.

Tags: , , , , ,