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Sunday, 15 March 2009

Oh my Darling, Oh my Darling, Gordon Brown ...

... he is lost and gone forever.

Words are cheap, and the words coming out of the G20 planning meeting, or as the BBC tried to big it up the meeting of sherpa preparing for the dummit, have been cheap in every sense.

A year ago, when the UK proposed to hold this year's G20 meeting, Brown thought he had won the opportunity to strut his stuff on the world stage, with the possibility of exercising "thought leadership", but world politics is a funny thing and often baffling to demagogues such as Brown. After all, he has been used to having his own way in British politics, so that what he says is acted upon almost without question from his own supporters. It must feel strange for him to be try to lead the world only to find that the equally headstrong leaders of other nations choose to go their own way.

Until earlier this week, Brown was flying hither and thither trying to persuade the world that they should all be spending vast amounts of borrowed money just like him and his new friend Obama. But Brown's borrow and spend strategy is really to cover up his already massive funding gap. On closer inspection, the UK has had very little fiscal stimulus - the 2% VAT cut was largely ineffective - but a whole lot of bolstering of banks' capital.

Other nations, particularly in the EU, see things differently even though they are wither in or heading for depression. After all, they do not all have a busted flush of a financial system like the UK and the US, which is why they rejected British proposals for a borrow and spend strategy at a meeting of EU finance ministers earlier this week.

German industrial output may be suffering, particularly from a drop in demand from the UK, US and China, but there is nothing that indicates that German industry is broken or suffering from competition. Ms Merkel probably realises that as the world economy picks up and demand increases Germany's economy will do the same. For her there is no point in creating massive artificial stimuli. So on that front Brown's initiatives look shot to pieces.

We also heard earlier this week that British organisers were unable to get a response from US officials when they asked what their requirements were. Then later in the week US Secretary of the Treasury Geithner suggested that the IMF should be given an "expanded role". Nobody seems to be quite sure what that means except that it probably means several hundred billions of dollars more funding. Japan has promised to give some more, but it looks like Germany will be asked to fund the IMF by considerably more. One of the usual arguments against IMF funding is that once scertain overall fiscal and monetary parameters are established the IMF does not control the use of the money it lends. Some say that is a good thing because any money spent boosts the economy even if it is largely wasted (Brownian economics). But hang on, if Germany won't "waste" money boosting its own economy, why would it want to do the same for Vietnam or Botswana.

But the other role that the US/IMF may be pushing for but have not yet announced, may be an expanded role as a world economic policeman, including overseeing the international banking system. The IMF have long pushed for many of the central bank coordination and oversight roles held by the BIS. Whereas the IMF is largely dominated by Washington, European countries are in aggregate more strongly represented at the BIS. After the disasters brought to international finance by US "structured finance" and US rating agencies, are the Europeans really going to let the IMF have their way on this?

More importantly for Mr Brown, the IMF warned about the state of the UK economy, the overheated housing market and the likelihood of a crash. If Mr Brown now decides that we should be listening to the IMF, he will rightly be pilloried by critics telling him that he ignored the IMF for the last 10 years.

Anyway, for the benefit of lovers of cheap and trashy litereature here is the meaningless communique of the pre-meeting.

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