IMF or no IMF for the lucky few?

...That is the question

First of all, let us remind you why we are paying a great deal of attention to the health of the world economy. This is because the private security response needed to keep things stable is so far attainable, but probably not if the world economy spirals down to an unsuspected deeper bottom. This is also the reason why the G20 meeting this week, ordinarily the most expensive talking shop in the world together with Davos, is unusually important.

There are four important poles in the G20 debate. On the one hand, there are the countries that would like to spend more trillions on stimulus plans, mostly borrowing and printing money, and want the rest of the world to follow. The UK and the US lead the pack. The opposite pole is led by Germany, which believes that pumping more money into the world economy would result in a longer and more painful path to recovery. On the other hand, there are the countries that deem the tightening of financial regulation and dealing with offshore banking issues immediate priorities. The UK also leads this call. On the other side, we find those who argue that this is necessary (and a politically correct convenience), but a distraction for the time being. Off course all G20 governments also promise that they will not engage in protectionist policies.

Is there any hope an agreement will be reached at the G20 Summit? No. This is partly because people in the West keep arguing that the global financial crisis is about credit not flowing, hence a global credit crunch. However, to most of the world, including China, India, Brazil, and Mexico, credit is not the problem, but the contraction of their economies due to eroding demand for commodities and manufactures in the West.

In spite of disagreements, the G20 heads of state need to accept that the recovery of the US economy takes precedent, as the country is behind a great deal of the world’s consumption and the reserves of far too many countries are pegged to the US dollar. Further, the bond between consumption in the US and production in China, which greases the wheels of the world economy, is critical to sustain. This leads us to focus on the real sick patients.

It is perhaps time we fast forward the debate and start thinking about IMF programs to rescue the British, the Irish, the Spanish, and perhaps all the Eastern European economies. These countries are in need of resources beyond their means: they do not possess an industrial base and ownership of natural resources broad enough to sustain their growing levels of debt. Printing money (read ‘quantitative easing’) is not and has never been an option for these countries. The soonest these houses are put in right footings the earliest we can start dealing with the rest of the world, which holds the bulk of the natural and agricultural resources the world consumes. Otherwise, the debate will continue to drag on, with unrealistic expectation and a handful of countries disproportionately taking center stage.

If things are not turned around this year, the so-called credit crunch will spread to all the G20 countries and beyond. An uneven global revolution, with low-level violence in some parts and fully blown conflicts in the most deprived areas, looms. Hear this: there are not enough public and private forces available to deal with such multidimensional scenario responsibly.