The RMB as the Reserve Currency

I have a very curious sense at the moment of the world moving in slow motion. I had thought that the economic crisis would create dramatic moments, but in some respects it appears to be moving through a gradual shift.

One of the predictions that I have made, on two occasions, is the collapse of the $US and the end of the reserve status of the $US. However, it appears that the end of reserve status is being achieved with little drama, as it is apparent that the RMB is slowly but surely being positioned as a replacement of the $US as the reserve currency. We have this latest news from the China Daily:

Five major trading cities have got the nod from the central government to use the yuan in overseas trade settlement - seen as one more step in China's recent moves to expand the use of its currency globally.

The most interesting thing about the article is that the newspaper is part of the state run media, and therefore is careful to toe the party line. It is the following section that grabbed my attention:

Analysts said the experimental use of the yuan in trade settlement also reflects policymakers' rising concern over the shaky prospects of the US currency, of which China has large reserves from previous trade growth, and their willingness to gradually expand the yuan's use globally.

"The trial is the latest move toward making the yuan an international currency," Huang Weiping, professor of economics at Renmin University of China, said. "The prospect of a weaker US dollar is making the transition more imperative for China."

The method here is typical of the way that the Chinese government works. They use another person to make explicit an implicit policy, and thereby leave the situation open to later government denial. However, the idea is now 'out there', and that is their intention. The article also mentions several of the deals that I have discussed in past posts, and therefore offers a good summary of the progressive establishment of the RMB as a reserve currency to challenge the $US:

The mainland is trying to promote the use of the yuan among trade partners and, in the past four months, has signed 650 billion yuan (US95 billion) worth of swap agreements with Argentina, Indonesia, South Korea, Malaysia, Belarus and the Hong Kong Special Administrative Region. The agreements allow them to use their yuan reserves to directly trade with the Chinese mainland within a set limit in volume.

All the while this is going on, there is still chatter in the mainstream media about IMF Special Drawing Rights (SDR) developing into a new global currency. For example, Edmund Conway of the Telegraph points to a paper from the Governor of the People's Bank of China, in which there is a strong backing for SDRs as a global currency.

In fact, perhaps inadvertently the Geithner, Darling, Brown and Obama initiative has dramatically increased the odds of this happening [SDR as a reserve currency]. It will have increased the appetite of the Chinese, the Russians and the others who would like to depose the dollar as the world's reserve currency. Moreover, it has cemented the likelihood that they push for the deposition by trying to get the SDRs installed as the dollar's replacement. Quite how this would work remains to be seen. There appear to be plenty of obstacles and it is dubious that the SDR could be transposed to become a general unit of exchange.

I strongly recommend a read of the paper from the Chinese central bank governor. However, if you read it carefully, it might also be seen as much as an anti-$US statement, as much as a statement in favour of SDRs.

The problem for many analysts is that they are more likely to take an official paper as policy, rather than an article in the newspaper. However, a reading of Chinese history shows that a newspaper article is often used as a method of floating a new policy, often in contradiction to official policy. For example, the battle lines of the Cultural Revolution were heralded with People's Daily articles on the (apparently) innocuous subject of a Ming dynasty official called Hai Rui. I will not delve into details here, but this seemingly unimportant matter was exactly the opposite, and was later to be the precursor to a massive shift in government policy (for a full discussion of this you can find a good outline in 'The Search for Modern China' by Jonathon Spence, chapter 22 - which is one of the better studies of modern Chinese history).

Although the Hai Rui debate dates back to a different period of Chinese history, the methods of using the press, using proxy spokesman, and many other features of the case, can still be seen in use today. A more recent example that I discussed in a post many months ago was the indirect threat reported in a Telegraph article in which the Chinese obliquely threatened to destroy the $US if the US pressed further on trade disputes. As in this case, the idea was floated in such a way that allowed for later denials of this being an official policy. For those who may doubt that China might operate in such a way, I would suggest a reading of my post in which I discussed Chinese quasi-mercantilist policy in some depth.

In other words, China is now actively positioning itself as (at the least) a major issuer of reserve currency, but is doing so in a way in which - if their attempt were to meet resistance or fail - they can step back and point out that it was never their intention. They can therefore proceed with an official position of support for SDR, whilst acting to develop the RMB as a reserve, whilst never risking losing face. It is a very effective way of operating.

The real question is whether they might succeed in this ambition. Can the RMB become the world reserve currency? As I have pointed out in previous posts, they are already using their financial power to bolster their position and influence in developing countries (e.g. a recent loan to Mauritius). At the same time, despite my predictions of the demise of the $US still not coming to fruition, the actions of the US government, the irresponsible fiscal and monetary policy, continue to erode faith in the $US. However, the real key to reserve status is when trade is more broadly conducted in the RMB, such as move to trading oil in RMB. Perhaps Venezuela will offer such an opportunity? An article here suggests that Venezuela may need to turn to China for financial support, and this may well present an opportunity for China to start this process:

In Latin America, the external funding situation remains relatively stable but in the case of further deterioration of capital flows, the solid economies would be able to tap the IMF or the Inter-American Development Bank (IADB) for non-conditional lines of credit, while the economies with less sound macroeconomic frameworks such as Ecuador, Argentina and Venezuela would most likely only be able to obtain funds through more formal conditionality or by turning to lenders like China.

Returning to the question of whether it is possible, I see no reason to prevent the RMB from taking on this role. There has been talk about the RMB not being 'liquid' enough, the lack of depth of their financial markets. However, I take a fairly simplistic view, which is to ask whether a currency has the underlying strength of being able to be used to purchase goods and services. The answer to this question is, of course, 'yes'.

The remaining question is whether the Chinese government would want to have the RMB as the reserve currency. If it were to become the reserve currency, then it would surely dampen their export led growth, would it not? The RMB would appreciate in value and that would hurt the Chinese economy? There is some logic in this argument. The greater demand for the RMB, the more that it will appreciate - in principle. However, they would be able to hold down the value by expanding supply of the currency, though avoiding the level of expansion that has been the case with the $US. They will have surely learnt the lesson of the $US, which has seen the abuse of reserve status to finance massive deficits in government spending. Provided that they increase supply to provide sufficient to meet demand for the currency for trading usage, they will avoid the problems of the $US.

This point is critical. If a currency expands as a unit of exchange, rather than as a method of financing borrowing, the supply might expand without negative impacts and the value of the currency might remain stable. A currency is, in the end, a unit which promises to be utilised for exchange of goods and services and therefore needs to have the backing of an economy capable of honouring that promise. When a currency becomes a reserve currency, it might exceed that capability from the issuing economy, but still remain a currency in which there is confidence. Provided that confidence remains, there is little likelihood of the promise being called in all at once. In this respect, it mirrors fractional reserve banking in which the assumption is that it is safe to loan depositor money on the basis that not all depositors will want their money at the same time.

In other words, provided the currency continues in circulation, without a sustained call on the promise of the currency to provide goods and services from the issuing economy, it can hold and store value. My prediction of the (not yet arrived?) demise of the $US is that the underlying weakness of the $US is resultant from the abuse of the reserve status to build up a debt mountain, and the use of the reserve status to finance that debt. It can only service that debt through new currency issuance. There is no reason to see why China might follow such a course as a major creditor nation, and this is why it is so well positioned as a reserve currency. They only need to expand the money supply such that they provide sufficient units for exchange, not to finance debt. This is the inherent strength in the RMB, and why it might replace the $US.

I am sure that some will suggest that this is a simplistic approach. There are many other factors that are involved, some of which are psychological, or concerned with 'belief'. Whilst I can acknowledge these factors, indeed have to acknowledge them when viewing the continuing position of the $US, I do not believe that the underlying reality can be avoided for ever. In the end, as the situation becomes increasingly transparent and plain before the eyes of people, the underlying reality will become self-evident. In this case, the RMB as a unit of exchange for real goods and services is solidly backed up with the capacity to service the implicit promise of the currency.

On the other hand, the $US is expanding in volume to finance yet more consumption, the output of the economy is in decline, and the units in circulation are expanding beyond what is needed for exchange - whether for internal use or for use as a medium of exchange outside the US. Where is the underlying ability to service the promise?

The big question in my mind is when belief will end, and when will reality reassert itself?

Note 1: A regular commentator on the blog, Lord Keynes (a pen name) will be contributing an article in the future. Lord Keynes is a critic of many of the ideas in this blog, but I believe in open debate, such that I believe this will be a positive contribution. MattinShanghai - I would welcome an article on CDSs, an area I am aware you have both a strong point of view, and have evidently researched in some depth.

Note 2: I have had another article published in the Trade and Forfaiting Review, and you may wish to read this here. The article discusses the Japanese experience of quantitative easing (printing money).

Note 3: There is an interesting article here that I did not manage to integrate into this post. It is an essay on savings by the Chinese central bank governor, and makes interesting reading.

G20 - Mark II

In my previous post, I managed to get hold of the 2008 G20 communique, and therefore spent considerable effort analysing an out of date document. Following on from this credibility sapping disaster of analysing the 2008 G20 rather than the current one, I shall try again. This time the full text can be found here.

Having analysed the details of the last communique, the most striking thing about the latest one is how little has changed. One year on, and the main difference is that there is a sense of greater panic in the new version, but the solutions remain the same. Furthermore, there is no indication that any of the points in the last communique have made any difference whatsoever to the direction of the world economy.

Having erroneously analysed the last communique instead of the recent one, I find myself at a loss to actually analyse this communique. I suggest a reading of my first erroneous post, as many of the points remain the same. The actual substantive differences are largely elusive. There is an element of crowd pleasing measures, such as the crackdown on tax havens, and some witless discussion of a 'green' recovery with no substantive backing behind them, and chatter about millennium development goals. None of this is of any significance to the world economic crisis.

There are the same calls for a more global regulatory system, with the same problem of mixed messages on international cooperation and national systems, and many discussion of many actions that are already in process. There are the same calls for stabilising the financial system - which simply serve as a reminder of how much money and for how long the money has been poured into the financial system, only to still see it remain in a state of dysfunction.

This is not to say that there is nothing new, but rather it is largely reactive to measures that are already in place. Many of the proposed actions are actually a recording of what some of the governments have already done, rather than commitments to new action. Furthermore, I have recently seen elsewhere that many of the figures for various stimuli are simply double counting....

Perhaps the first difference that first struck me was the language of Gordon Brown seeping through the text. A typical example is as follows:

...that growth, to be sustained, has to be shared; and that our global plan for recovery must have at its heart the needs and jobs of hard-working families.

There is much more similar fluff, to which I will devote no further attention. However, the level of fluff appears to have increased, and this is perhaps a signifier of how little change there really is. Returning to the meat of the communique, there is a difference in tone, but no substantive difference in the broad intent in the proposed solution/s. There is a stronger emphasis on a 'global solution' but this was the underlying intent of the last communique. The way that this 'global solution' takes shape can be found in the following key points (quotation):

• 'restore confidence, growth, and jobs;
• repair the financial system to restore lending;
• strengthen financial regulation to rebuild trust;
• fund and reform our international financial institutions to overcome this crisis and prevent future ones;
• promote global trade and investment and reject protectionism, to underpin prosperity; and
• build an inclusive, green, and sustainable recovery.'

Much of the text puts flesh on these bones, but much of the flesh is already in place in various countries, and nothing much appears to have changed in the objectives since the last communique.

However, there are a few points worth in the detail worth highlighting. The first of these is one of the most important, and that is that there is a commitment to not use devaluation of currency as a way out of trouble. However, the ongoing expansion of the money supply in countries in the US and UK might reasonably be seen as just one kind of such devaluation. The Chinese government have stressed their ongoing concerns at the risk to the $US of lax fiscal and monetary policy, and they might be seen as potential 'devaluers' themselves as their export machine comes to a halt.

The policies of printing money do get some attention in the following passage.

We are resolved to ensure long-term fiscal sustainability and price stability and will put in place credible exit strategies from the measures that need to be taken now to support the financial sector and restore global demand

This is a coded way of suggesting that the means of pulling the money supply back from the binge of money printing is vital, and is clearly aimed at those who have already turned on the printing press. However, once again, there is no substantive measures, just vague suggestions.

Overall, whilst highly embarrassed at analysing the old text, I am actually quite relieved that I did so. It has allowed me to see two key points in the latest communique. Firstly it is really, with a few exceptions and difference in detail and some additional fluff, a policy of 'more of the same'. The second point is that the first dose of the same medicine has done nothing to reverse the ongoing decline. Where there are any shifts in the underlying substance, such as the policy of recovery from money printing, there is absolutely no way to account for whether an individual government might be acting within the intent of the communique.

Overall, this appears to be a communique aimed at crowd pleasing, rather than offering anything which will significantly alter the current state of the world economy. As in the 2008 communique, it is possible to see a disregard of the underlying causes of the crisis, though this time there is even less discussion of the imbalances in the world economy, perhaps reflecting the increasing influence of China.

In short, it really is more of the same. The 2008 communique offered much the same message, but it is difficult to see that the previous G20 meeting led to anything that helped resolve the crisis, and little reason to believe that this current agreement will lead to anything that will make any new impact. Most of it is simply codifying what has already been agreed/taken place.

It is, quite simply, a piece of theatre.

Note 1: Once again I would like to restate my apology for the fundamental error in my last post. I have taken considerable care in this blog to try to use sound references and information. In this case I failed to do so for a simple error of not checking the date on the article. On the upside, it is a lesson I doubt that I will need to re-learn. Another upside is that I have some of the best editors that can be found - you the readers. The only trouble is that this is retrospective. Once again, thanks Tiberius for (so politely) pointing out my error.

The G20 and Ongoing Delusions

A Major Error in the post - comment added on 6 April:

I have had a commentator point out a somewhat ridiculous error in the blog. I intended to write about the recent G20 communique, and instead pulled up the text from the previous communique. Thank you to Tiberius who (very politely pointed out this error).

Essentially, the error was caused by a search for the document pulling up the older version. I should have checked the dates. This is a serious error and I therefore would like to offer my apologies. My aim was to go straight to the source, rather than rely on the interpretation of others. However, checking that I have the right source is a good starting point.

I have left the post as it stands. The principle of this blog is that nothing is deleted - even if it is rather a bad mistake. I only ever add notes and comments (as in this example) and date the change. However, in light of the error, please disregard this post. Once again, please accept my apologies for an idiotic and careless mistake.

I was puzzled at some of the commentary in the other media, but their commentary makes rather more sense now.....

Cynicus Economicus

Original post follows:

As promised a post on the G20 outcome. If you have the time you may wish to read the full text of the official communique, which can be found here.

Perhaps the most striking thing about the communique is the acceptance that the nature of the financial system was such that the world developed an unsustainable imbalance. However, the way that this is phrased still fails to accurately reflect that many of the imbalances were the direct result of policies of central banks, and no mention is made of the role of the regulators in creating the financial products that were to play such a large part in the crisis. In fact, the communique offers a vague and disingenuous picture of the causes. As such I will quote the section titled 'Root Causes of the Current Crisis' and examine it in some depth:

3. During a period of strong global growth, growing capital flows, and prolonged stability earlier this decade, market participants sought higher yields without an adequate appreciation of the risks and failed to exercise proper due diligence. At the same time, weak underwriting standards, unsound risk management practices, increasingly complex and opaque financial products, and consequent excessive leverage combined to create vulnerabilities in the system. Policy-makers, regulators and supervisors, in some advanced countries, did not adequately appreciate and address the risks building up in financial markets, keep pace with financial innovation, or take into account the systemic ramifications of domestic regulatory actions.

4. Major underlying factors to the current situation were, among others, inconsistent and insufficiently coordinated macroeconomic policies, inadequate structural reforms, which led to unsustainable global macroeconomic outcomes. These developments, together, contributed to excesses and ultimately resulted in severe market disruption.

The best way to examine this, is to take each point, and examine how it reflects the reality. Point (1) is as follows:

'During a period of strong global growth, growing capital flows, and prolonged stability earlier this decade, market participants sought higher yields without an adequate appreciation of the risks and failed to exercise proper due diligence.'

They describe economic growth during recent times, and this is an accurate description of the world situation. However, what they do not acknowledge is that the so called growth of the Western economies was a growth in activity form debt expansion, not a growth in wealth. In other words the growth was centred in the developing economies, and the growth in the Western economies was illusory (a post which shows how illusory that growth is can be found here).

With regards to the market participants (the major banks) seeking higher yields and taking risk, they were simply responding to two factors. One of these was the wall of money flowing into Western economies due to factors such as the low interest rates and Quantitative Easing (printing money) in Japan, the massive accumulation of petro-money in the Gulf states, and the quasi-mercantilist policies of China to achieve export growth. The problem such a wall of money might create is that, whilst the first tranches of money might be usefully used, the later tranches of money would have ever less opportunity to be invested in productive investments. The money had to go somewhere, and we can see the roots of bad lending into consumer markets. These imbalances were not the result of 'markets' but the active manipulation of the economy by governments.

If we combine this with the Basel regulatory framework (the other factor) it is possible to see the severe problems which can be firmly laid at the door of the central banks, and regulatory systems. Even the Bank of England admits that Basel I was the spur towards securitisation, and encouraged off-balance sheet activity. To this we might add that the system was responsible for the use of ratings agencies to assess products (e.g. CDOs), and the internal 'rocket scientist' calculation of risks that proved to be so wrong headed. Finally, the accords actively encouraged banks to lend to governments for the purposes of capital adequacy, thereby offering a further spur (as if any were needed) for some Western governments to borrow excessively (thereby leaving them vulnerable to the current shocks). A longer discussion of how the regulatory system helped to cause the crisis can be found here (a long post, and this is just one element of it).

In other words, whilst the banks may reasonably be cited as problematic, if not idiotic, they were in large part responding to a regulatory and macro-economic environment that was determined by government and central banks. It is always difficult to assign culpability in such cases, but there is much that can be laid at the doors of those who are behind the communique, those who now profess wisdom after the event.

Point (2) is as follows:

At the same time, weak underwriting standards, unsound risk management practices, increasingly complex and opaque financial products, and consequent excessive leverage combined to create vulnerabilities in the system. Policy-makers, regulators and supervisors, in some advanced countries, did not adequately appreciate and address the risks building up in financial markets, keep pace with financial innovation, or take into account the systemic ramifications of domestic regulatory actions.

Whilst this appears as an acknowledgement of fault by regulators and government, it still essentially pins the blame firmly on the banks. The nearest it comes to any real acknowledgement is the mention of 'ramifications of domestic regulatory actions', but this fails to accept that the underlying problem was resultant from the combination of factors outlined in response to point (1). By appearing to accept a modicum of fault, this is simply a distraction from the depth of the problems that were created by those controlling the economic system.

Point (3) is as follows:

Major underlying factors to the current situation were, among others, inconsistent and insufficiently coordinated macroeconomic policies, inadequate structural reforms, which led to unsustainable global macroeconomic outcomes. These developments, together, contributed to excesses and ultimately resulted in severe market disruption.

This ignores the single most important factor in this economic crisis, a point that I have discussed at many points in this blog. The real underlying cause of the crisis is the doubling of the global labour force in a period of about 10 years, resultant from the increases in mobility of capital, access to technology and access to world markets (discussed in more detail here). It is simply baffling that one of the most dramatic changes in the world economy continues to be ignored -even as a potential factor.

Having misread the causes of the crisis, it is inevitable that the solutions that are proposed are going to be misdirected. On the positive side, at least the communique acknowledges the severity of the problems, but it would be impossible to do otherwise. I will go through some of the points that they are proposing:

Continue our vigorous efforts and take whatever further actions are necessary to stabilize the financial system.

This raises the simple question of what has been achieved so far? $US trillions have been poured into various bailouts, and yet there is still a dysfunctional financial system. Banks which are completely insolvent continue to absorb ever more money whilst still remaining insolvent. The latest method of hiding the insolvency is the change in the 'Mark to Market' valuation of assets, which is a way of hiding the underlying (non) value of assets. Quite simply, such policy is delusional. The latest Geithner plan for the US financial system, is just yet another case of destruction of wealth dressed up as salvation. However it might be spun, an artificial price will be set for toxic assets, and the inevitable losses will have to be 'monetised'. Such monetisation means yet more printing of money such that, one way or another, every $US will be taxed to pay to support insolvent financial institutions.

At each stage of the bailouts, there are the same promises that the latest measure will solve the problem, but each time the bailout fails another round of bailouts follow. All the time, there is talk of 'getting credit flowing again', as if the trade imbalances might be solved by endless expansion of credit.

Underlying all of this is a belief that some financial institutions are simply 'too big to fail', and this is at the heart of the problem. Governments have determined that these financial firms can never fail, and then wonder why they take outrageous risks. They have created a casino in which, if you bet on black and red comes in, it becomes an inconvenient blip in your operations. One way or another, it will eventually be back to business as usual, with every other sector of the economy paying for bank losses.

The next point is as follows:

Recognize the importance of monetary policy support, as deemed appropriate to domestic conditions.

This should win prizes for having no meaning whatsoever. What on earth might this actually mean? Does this mean that, in the past, this has not been policy? Have governments and central banks previously not recognised the importance of monetary policy support?

The point that follows this does, at least, offer something that might have a vague meaning:

Use fiscal measures to stimulate domestic demand to rapid effect, as appropriate, while maintaining a policy framework conducive to fiscal sustainability.

The key word in this is sustainability, but what might or might not be sustainable is not mentioned. For example I have, since the start of this blog, suggested that the UK government would need to turn to the IMF for funding for the very reason that the fiscal policy would not be able to be sustained in the face of economic crisis. From the Telegraph we have an article in which 'a senior cabinet minister' is talking about the necessity to go the IMF. The latest spin on this is to say that it is no longer to be seen as an act of desperation, which is perhaps one of the most audacious incidents of spin in this whole crisis. Can the US fiscal policy be sustained? The Congressional Budget Office thinks not....

I also asked in the early posts in this blog who might be able to fund the IMF as the crisis deepens. As if on cue, there is now the news that the IMF is simply going to print money to pay for activities:

At the behest of the world leaders, the IMF will increase the amount each country has in so-called Special Drawing Rights (SDR) by $250bn.

This is effectively global quantitative easing – comparable to the unprecedented measures the Bank of England carried out last month when it committed to pumping £75bn into the British economy. This is a form of printing money.

Under the IMF scheme, each country has an allocation of a shadow IMF currency – known as SDRs. This currency can be converted into useable currencies such as dollars, euros or sterling. The amount of SDRs was dramatically increased by more than ten-fold yesterday. The scheme is best regarded as a safety valve for struggling economies, and rich countries are likely to donate some of their SDR allocation to those most in need.

Is the endless fiscal expansion based upon credit, endless expansion of the money supply sustainable? What do these people think money actually is? Is it some magic thing that can create actual wealth from nothing? Does the production of money of itself make us wealthy, or does our labour make us wealthy? Endless borrowing for consumption and spending and printing of money does not create wealth - it simply destroys it.

As this is already a long post, I will not go into more detail on this, although this deserves greater consideration. Instead I will jump to the discussion of regulation. On the one hand the communique insists that regulation is a national concern, but on the other suggests that action should be taken to avoid 'regulatory arbitrage' i.e. seeking out the best regulatory environment. That these two goals are incompatible is surely obvious? They later say:

We call upon our national and regional regulators to formulate their regulations and other measures in a consistent manner. Regulators should enhance their coordination and cooperation across all segments of financial markets, including with respect to cross-border capital flows. Regulators and other relevant authorities as a matter of priority should strengthen cooperation on crisis prevention, management, and resolution.

So what they really mean is that there will be international standards. However, assuming that they can come up with a commonality of regulation, is that a good thing? The first point to mention is that the Basel frameworks had this goal, but were in fact major contributors to the crisis. There are many more passages that have similar objectives. Perhaps the absurdity of such regulatory aims can be found in these passage from the communique:

Strengthening Transparency and Accountability: We will strengthen financial market transparency, including by enhancing required disclosure on complex financial products and ensuring complete and accurate disclosure by firms of their financial conditions. Incentives should be aligned to avoid excessive risk-taking.

And:

Enhancing Sound Regulation: We pledge to strengthen our regulatory regimes, prudential oversight, and risk management, and ensure that all financial markets, products and participants are regulated or subject to oversight, as appropriate to their circumstances.

At the heart of this is the central delusion that risk can be managed and assessed. It is the idea that risk is somehow something that can be defined. This is exactly what the Basel regulatory framework sought to do. This is the Basel framework that said that essentially said that OECD banks were 'safe'. They were not. Why will the next method of assessing risk be any safer? The same people who made this error are likely to be the same people who will make the next determination of risk.

Even more disturbing is the detail. For example we have the following:

Mitigating against pro-cyclicality in regulatory policy

We can all remember talk of the 'Great Moderation', the 'New Economy', the 'post-Industrial Economy', or the infamous Gordon Brown statement of no more boom and bust. Just as the determination of what was safe was completely wrong, so was the determination of the state of the world economy and national economies. Once again, the same people who called the world economy wrong, who called the state of national economies wrongly, will be the ones that will now apparently call them right. Why should such assertions be taken seriously?

In one respect, the communique does offer a positive perspective, and this is the commitment to open trade. However, there are no mentions of what allowed the severity of the distortions of trade, such as central bank manipulations of money supply. Whilst tariff barriers are important, they pale into insignificance compared with the potential distortions in the money supply, such as those created in Japan, or the Western economies. What of Chinese mercantilism - holding down their currency to ensure export growth, and to make imports more expensive? Can a system of open trade work in a system where these distortions are allowed?

Inevitably, the communique covers a lot more detail, and I will not comment on each and every point. A summary of the communique can be seen as follows:

• An assessment of the crisis that ignores the centrality of governments and central banks in the creation of distortions - and crucially ignoring the effects of the impact of the massive input of labour and the role of this expansion in the crisis
  
• A belief that the same people who failed to see this crisis coming will see the next crisis coming
• A belief that the same regulators who set up the current system, with terrible results, will be able to regulate against another crisis
• A belief that risk can be seen in advance, even though history shows us that it can not be foreseen
• A belief that a more unified regulatory system will stop crises, when the previous attempt to do so helped create the systemic nature of the current crisis
  
• No mention of how the money supply in individual economies is one of the most central/important factor in the world trading system - just some vague illusions with no action on this central factor
  

Perhaps the central point here is that our 'betters' somehow see themselves as both omniscient and omnipotent. They are still deluding themselves that they have the wisdom and foresight to control economies through their endless tinkering. All the while they delude themselves in this way, they still fail to acknowledge their own pivotal roles in the current crisis. It is clear from the communique that they know that there are problems that they have created, but these are buried and lack any clear explanation or action. It is far easier to blame the impersonal financial system (and outside of the G20 scapegoat some big name bankers) than confront their own failings.

In the case of the Western debtor economies, if our 'betters' were to accept their role in the crisis, they would need to forgo some of their power. In particular, they would have to abandon the fiscal irresponsibility that allows them to spend the future wealth of their voters, whilst pretending that it is the government's money to spend. It would mean that they would have to abandon their endless expansion of money and credit, and face up to the underlying real wealth creation of their economies, and face the fact that their policies of borrow and spend simply can not be continued. It is a message they fear telling the voters, and so they pretend that such a system might continue.

For the creditor nations, they would need to face the fact that they have been pouring their wealth into a delusion, and that they must accept that the paper they exchanged for their wealth is of little value. That would be a very bitter pill for them to swallow.

The G20 is a whitewash, which just promises more of the same delusion that put the world economy into this mess in the first place. It is the same people with the same delusions offering more delusions. It is not a new world order, but the maintenance of a fantasy old world order. Quite simply, they propose more and more of the economic tinkering that hid the changes that took place in the world economy - the massive expansion of the world labour force. Their solution is to try to maintain the imbalances that this expansion created. Rather than accept the real redistribution of wealth that this represents, they are seeking to pretend that they can keep going on as before - just with ever more of the kind of 'control' that turned an adjustment into a crisis.