Canada sends warning signs to G20 about global economic recovery
We’ve been peppered with primarily buoyant news in recent months about the changes and trends being seen in the economy based on final results for 2009 and the early indicators for 2010. A market that was staggered by a loss of confidence in the banking sector coupled with an employment market that shed jobs at an alarming rate left most of us applauding the end of 2009 with a guarded hope that things would soon be 
better. More than two years of recession will shake the confidence of even the most resolute optimists and a recovery will be welcomed but not presumed, at least not this early. As I’ve written in earlier posts on the blog many indicators show that growth in the new year can be expected but with caution underpinning everything prediction that is being published.
I subscribe to knowledge being power and thus have no reservations about the warning signs being shot like warning flares by the Canadian government at this weeks G20 Sherpas meeting in Ottawa today. The message at the meeting in advance of the G20 summits in Toronto and Seoul scheduled for June and November is being labeled a ‘momentum killer’ by some, though I think the comments from Prime Minister Harper provide a suitable reality check for a global economy that needs to both inch forward but also consolidate changes that safeguard these gains.
Canada’s report has earmarked potential scenarios of an extension to the recession or a new debt-driven catastrophe if promised reforms are not enacted and followed. The discussion included officials from the Group of 20 industrialized and emerging nations, with Canada pointing out the potential problems should countries maintain fixed exchange rates, or if G20 nations delayed on actioning economic and financial reforms previously agreed last year’s summit in Pittsburgh. Failure to heed such issues could bring debt levels that will cripple economies, spark interest rate hikes and rapidly spiral into a fresh crisis. The paper specifically said:
“Advanced countries need to engage in fiscal consolidation over the medium term, but we also need the cooperation of emerging market economies,”
The 2009 summit in Pittsburgh agreed that the G20 would drive reforms but the clarity of what can be accomplished remains in doubt. China, remains under significant pressure to abandon its fixed currency position, which has helped it amass a huge trade surplus. While China wasn’t named in the document the outline of a situation in which rich nations cut deficits, while growing markets fail to let currencies move freely not stimulate consumer spending.
“In such a scenario, a deflationary spiral sets in… By 2011, deflation would occur in advanced countries, real interest rates would increase sharply, and growth would stall, Global imbalances would effectively be eliminated, but at the cost of a prolonged world recession.”
Ottawa is hosting two days of meeting where official are preparing for the next major summit in Toronto this June. Canadian Prime Minister Stephen Harper even went as far as personally addressing Thursday’s meeting, urging countries keep stimulus funds flowing to secure the seeds of recovery are not short-lived. Harper remarked:
“Open global markets have been responsible for the growing worldwide prosperity of the past generation. If we lose our commitment to open markets — for however understandable the short-term political reasons — then we will lose that prosperity. We discovered, that in the new world of the global economy, whether the skies herald rain or shine, we are all in the same boat, And though it is natural — and expected — that we all will defend our national interest, that national interest must be enlightened. It must take into account the overall, long-term needs of the entire global economy if that global economy is to prosper”
A diplomat from another G20 nation said Canada wished for the June summit to agree on the urgent need for a global realignment to balance such matters. The follow through in terms of actions to be taken at the follow on summit in Seoul later this year.
Research for this piece courtesy of Reuters and The Toronto Sun
This “fear of deflation” is just a ruse by central banks to keep inflating the money supply. Deflation does not keep people from spending – they always spend what’s necessary. And money NOT “spent” is then saved which means it is credit to someone who invests it for capital goods etc. thus it is again being spent, only not for consumption. Money never lies completely idle to any extent whether there’s inflation, deflation, stability or a solar eclipse. For deflation to seriously happen, not only the current extreme credit expansion by the central banks and states (through “quantitative easing”, stimulus packages, monetising and then spending national debt etc.) but also the money that was released into the economy PRIOR to the collapse would have to be “mopped up” again. This is nowhere to be seen nor would it be technically possible (confiscation aside) so we will rather see inflation than deflation.
Interesting points, I concur that deflation has been used as a ‘threat’ in the past, but with that said I don’t know that we’ve ever faced such a volatile market as we do at present, so is there more potential for it to happen? That’s a collective we – the thin ice is truly global this time.