What will come from the G20 summit?

Submitted by martin on 17 November, 2008 - 9:41 Author: Martin Thomas

The 15 November meeting in Washington of leaders from 20 governments representing 85% of global output will have little effect on the tsunami of job cuts and home evictions already heading for us.


This version of the article is longer than the one in the printed paper
In the wordy text agreed at the Washington meeting, measures "to stabilise financial markets and support economic growth" are invoked, but vaguely.

The most specific commitment is a negative one. For the next 12 months, at least, all the governments promised not to raise "new barriers to investment or to trade in goods and services, impose new export restrictions, or implement WTO-inconsistent measures to stimulate exports".

Even that bit of text is double-edged. It proves first of all that the governments already feel big pressures for protectionist and beggar-my-neighbour moves.

The other near-specific commitment, according to US president George W Bush, is "agreement globally that credit default swap trades should be run through a central clearing house". (The formal text is less specific than that).

A credit default swap (CDS) is a sort of insurance policy, where A promises to pay B a certain stream of payments, and B promises to pay A a lump sum if a corporation or government defaults on a financial contract. Or, to put it another way, it is a way for B to buy income in return for taking on risk. The total outstanding in such swaps has risen from very little in 2000 to over $60 trillion at the end of 2007.

CDS have played a big part in the financial crisis, and governments hope that having CDS traded through an exchange (as shares are traded through a stock exchange) will improve regulation.

Even if more gets set in train by the follow-up meeting due in April 2009, this is small stuff - shutting a stable door after the horses have bolted and started kicking down trade and production. And in this stable there are many other holes which can be widened into open doors.

At a recent AWL London forum, however, I spoke on the economic crisis together with Simon Mohun, a Marxist economist noted for his work on the US economy. Out of this crisis, Simon Mohun suggested, may come a world looking much more like that of 1945-73 - much more economically regulated.

Unlikely, I said. No, replied Simon Mohun. The capitalist governments really are angry about the way the financial markets have plunged their affairs into chaos. They really want to do something about it.

Capitalist governments can and do act, in the interests of capital in general, against quite big individual capitalists or sections of capital. But will that happen now in so coordinated a way as to create a global new regime? I have several reasons for scepticism about the "new Bretton Woods" theory.

One: the strength of the resistance to any scheme of re-regulation. George W Bush, for example, after the 15 November meeting, made a point of repeating what seems to him "the simple fact": "the best way to solve our problems... is... economic growth. And the surest path to that growth is free market capitalism".

Second: even if the big capitalist governments had a clear plan for re-regulation and were pursuing it intently, it would be very difficult - short of conditions of cataclysmic economic collapse - to push "back into the bottle" the elusive, constantly proliferating, constantly self-transmuting global financial markets which have developed over the last 30 years as a twin of the globalisation of capitalist production chains and floating exchange rates.

Third: the invocation of the Bretton Woods conference of 1944, which established some of the parameters of the post-1945 world economic order, highlights the difficulties. Although 44 countries were represented at Bretton Woods, the decisive voices were only two: the UK, represented by John Maynard Keynes, and the USA, represented by Harry Dexter White.

Though Keynes was by then recognised as the greatest economist of the day, and the British Empire was still a force, really the decisive voice was one: White's, and the USA's. Around the end of World War 2, the USA controlled maybe more than half the world's manufacturing capacity, and 70% of the world's gold and foreign exchange reserves. (And so White, the US Treasury's chief economist, became the architect of the IMF while he was also spying for Stalin's USSR).

Fourth: The governments involved were wartime governments, confident about overruling sectional interests. They were responding to a decade of catastrophic economic dislocation before the start of World War Two, and the memory only 25 years old of the economic chaos and revolutionary disruption that followed the end of World War One. They were geared up for drastic decisions.

Even so, the Bretton Woods conference was three solid weeks - after long preparations beforehand - not a one-day affair like the 15 November event.

Fifth: Keynes at least had a worked-out plan for Bretton Woods, based on substantial theory. No influential figure in government circles, as far as I know, has any comparable plan today.

Sixth: such is the dynamism and the inherently chaotic character of capitalism that the best-laid plans rarely play out straight.

The Bretton Woods scheme, and Keynes's draft, were designed to tame the recurrent balance-of-payments crises which had crippled economic policy and development. In fact what did that much more, and enabled the Bretton Woods scheme to succeed after a fashion, was nothing predicted or provided for at Bretton Woods, but the vast outflow of dollars in the Marshall Plan and in the USA's overseas military spending, especially in the Korean and Vietnam wars.

It's better to wonder about how capitalism may "shake out" from this crisis than to imagine a tidy planned reconstruction. There are signs that it may "shake out" as more different from Bretton Woods than today, rather than more similar.

Some economists, Nouriel Roubini for example, say that we have already seen "Bretton Woods 2" - and it is disintegrating.

What they describe as "Bretton Woods 2" is the system by which China and other East Asian governments (and Saudi Arabia too) have kept their currencies more or less (though already more loosely) pegged to the dollar.

Bretton Woods 1 broke up when the mass of dollars overseas, and the dollar kept at a more or less high fixed rate of exchange with the German mark, the yen, etc., became unsustainable for a USA where German and Japanese manufactured imports were making more inroads. Today, the price of keeping their currencies pegged to the dollar may be becoming unsustainable for China and East Asia.

The government bail-outs of banks have deflected the sharp point of the crisis so that now it aims more at governments. And it is hitting middle-ranking countries, which had depended heavily on the previous global regime of easy credit, hardest of all. Net financial flows to what they call "emerging markets" are projected to fall from $602bn in 2007 to less than $300bn in 2009.

The governments of those countries are scrabbling around for credit, and can't get it in the global markets. Some governments are going to the IMF, because a deal with the IMF eases their way to further credit.

But it's not the IMF, or the USA, which holds the deep reservoirs of credit. Today China and Japan have the world's biggest foreign-currency reserves. China, Japan, Russia and India between them hold half the world's total. China's are seven times the IMF's. The USA holds less than one per cent of the world total.

Sovereign Wealth Funds based in the Emirates hold nearly $1000 billion in assets; those based in China, over $600 billion; Saudi Arabia's, over $400 billion.

Since the early 1970s people have written about the decline of US power, and it hasn't been true. But with this crisis, and the debacle in Iraq, it may be becoming true. The fact that the Washington meeting was of the G20 (20 governments, including China, India, etc.) and not of the old G7 is symbolic.

An important Marxist book on international finance which I consulted for this article, published in 1983 by Teddy Brett, was titled "The Anatomy of Global Disintegration". It was wrong then: the 25 years have seen the world more integrated, with the mediation of deep global financial markets centred on the USA, than ever before. But it may become right.

Add new comment

This website uses cookies, you can find out more and set your preferences here.
By continuing to use this website, you agree to our Privacy Policy and Terms & Conditions.