Thursday, October 27th, 2016 MST

Will G20 actions exacerbate problems?

A major G20 meeting presently is going on in London. In November 2008, an emergency G20 meeting was held in Washington. Still another meeting is expected later this year, probably as early as July.

Actually, G20 “working groups” meet fairly regularly, but it is only when high government officials gather that G20 meetings receive much publicity. The heads of state of twenty-three of the world’s largest economies will attend the London meeting. Obama is already there.

Standard Establishment news verbiage about the G20 meeting usually goes something like this: “The agenda is vitally important to the economic recovery of the world’s business and trading community.” Here’s another snippet (and snippets are about all you get): “It is now up to the IMF to determine how much additional support the world economy would need next year.” With that comment, you’re supposed to think of the IMF as a big brother there to make everything right. Finally, here’s one designed to scare people into accepting G20 actions: “With economic peril spreading around the globe…”

More specifically, German Chancellor Angela Merkel and Russian President Dmitry Medvedev, after a preliminary meeting in Berlin, called for a modernization of the architecture of international financial markets. Medvedev favors the creation of a modern foreign currency architecture.

If Medvedev want a modern foreign currency architecture, that means he considers the present system to be outdated and not working. Actually, what Merkel, Medvedev and leaders of other nations want is to strip the United States of the privilege of printing the world’s reserve currency, and understandably so as the US certainly has abused that privilege.

A perhaps more serious issue is not that the world’s financial structure is a shambles, but the notion that the very people who created the problems can solve them through more government actions. They cannot. No group can come up with the “just the right” redirection of resources to make the perfect soup. Any resources directed at the “problems” will have to come from somewhere, either taken over the next few years via higher taxes or via printing press inflation. The IMF is not sitting there with vast resources to throw at the problems.

Further, every G20 participant will seek actions that will favor his or her country’s interests, not actions (if they could actually figure out what those actions should be) that would alleviate the problems.

Ron Paul is right. Let the marketplace decide where the world’s resources are to be directed. Yes, that will mean quick and severe recessions in many countries. Recessions cannot be avoided after resources have been misdirected. The malinvestments (bad investments) that arose because of government interventions in the marketplace must be liquidated. And, they will most likely be liquidated at huge losses. Marketplace interventions only delay the inevitable.

Human nature being what it is, persons in high places will attempt to use their influence to mitigate their losses. In the US we’ve already seen that with the bailouts of huge financial institutions, which made bad investments (malinvestments) but did not have to suffer the total consequences for those bad decisions. The bulk of the losses were shifted to taxpayers and savers (misguided individuals still hoarding dollar-denominated investments that assuredly will decline in value as the dollar sinks.)

A couple of examples of how government intervention led to our financial crisis:

In the 1990s, the Clinton administration caused Fannie Mae and Freddy Mac to lend to borrowers not on their ability to repay the loans but because of their “positions in life.” The result was that the head of Fannie Mae actually bragged about being the largest lender to “poor people.” The first rule of money lending is to lend to someone who is likely to pay you back. That rule went out the window in the Clinton years. Then came Fed Chairman Alan Greenspan’s 1% discount rate.

In an effort to forestall a recession, Greenspan lowered the Fed’s discount rate to 1%, a move that took mortgage rates to levels below what the marketplace deemed appropriate. Money flowed into housing, prices took off, but the market overheated as prices rose to unsustainable levels. With the inevitable price correction came the housing crisis. The rest is history.

Today, no one anywhere near the government or the Fed wants to admit that intervention in the marketplace caused the problems that the G20 hopes to solve. Doing so would raise the issue that maybe, just maybe, any actions proposed by the G20 will cause still more problems. After all, the proposed actions will be still more interventions in the marketplace.

Readers who have followed closely the coverage of the G20 meeting know that one proposal being discussed is for the IMF to sell about 400 tons of gold to raise funds. Four hundred tons sounds like a lot of gold, and it is. But, before gold investors panic, they need to know that European central banks have been selling 400 to 500 tons of gold a year for more than a decade under the European Central Bank Gold Agreement. The IMF has said that if it sells, it will sell under the European Central Bank Gold Agreement, which limits maximum annual sales to not more than 500 tons.

For a discussion about the proposed IMF gold sales, read my February 2008 blog post titled Analysis of proposed IMF gold sales. Yes, proposed IMF gold sales have been around that long. They will be around until the IMF is out of gold. Talk of IMF gold sales and actual IMF gold sales are things that gold investors will have to get used to. As my post notes, in the 1970s, before gold rose to $850, we had to deal with not only IMF gold sales but also sales by the U.S. Treasury.