TCA Srinivasa Raghavan

What G-20 achieved at Cannes

Updated on: Nov 06, 2011

The world can now see more clearly how global power is no longer the monopoly of Western Europe and the US.

Last week, my paper sent me to Cannes to cover the G-20 Summit. On the plane, before the alcohol turned conversation around to things that truly matter, there was a lot of chatter about Europe's belief that debts need not be repaid.

My own contribution was to point out that it was wrong to blame the batsmen if a flat wicket encouraged poor shots.

Or, if you like, Keynes, by being instrumental in providing the intellectual basis for removing a metallic anchor for paper currency, got it horribly wrong.

That is, as long as the amount of currency that a country could issue was tied to its gold reserves by some multiple, there was an automatic limit on how much could be issued.

The moment this tethering was eliminated by the US in 1971, and it began to finance its war in Vietnam by printing even more notes than it had done in the 1960s, the balloon floated off and, like all balloons, became subject to random gusts of wind blown by speculators.

That produced volatility in the commodity markets, which was a private problem. But the freedom to print notes without restraint soon became a public problem.

The combination is what has proved fatal, not once but twice — once between 1976 and 1981 in Latin America and once between 2003 and 2008 in Europe. Both led to huge increases in bank deposits; banks were then forced to lend to make money; they then lowered the standards for risk, which meant all sorts of borrowers made hay while the sun shone.

When the time came to repay in 1980, the world, which meant only the US then, forced the Latin Americans to pay up to save its own banks. Latin America went into a decade of negative growth.

Now some Europeans, called PIGS for Portugal, Ireland, Greece and Spain, have made the same mistake. But, alas, this time the world is more than just the US.

It is forcing them to pay with negative growth just as Latin America was forced to do.

Nice.

***

Was Keynes wrong?

This is the sort of question that makes people suspend their judgment. You either get an emphatic no or a more diminutive ‘yes'.

But the truth is that every great intellectual makes what I call The Gödel Mistake.

Kurt Gödel was an Austrian mathematician. At the age of 25 he proved a theorem that showed that in all formal systems, there is one axiom that cannot be proved or disproved within that system.

For example, if you believe in God, then you can't prove or disprove her existence using religious discourse.

So, when you think about it, the key Keynesian axiom — that a metallic anchor for currency is bad — falls squarely into the Gödel category. It can't be proved and it can't be disproved. More formally, if the Keynesian system is consistent, it is not complete and if it is complete, it is not consistent.

That is, if a metallic anchor is bad (consistent with the rest of Keynes' argument), the role of government is not fully specified (incomplete); but if the role of the government is fully specified and is complete, a metallic anchor begins to look good because that is the only way of achieving such completeness.

***

The West's power

But formal logic aside, and given that the world had very little experience of populism in democracies, Keynes probably never thought that politicians would behave quite as badly as they have done.

That he was wrong is proved by the fact that budget deficits have become a permanent feature of economies with electoral democracies. In order to remain in power, those in power spend altogether too freely.

Thus, there was a time when budgets were supposed to balance and clearly this was wrong. The politicians meanwhile managed the intellectual climate and manufactured the myth that they had a higher duty to maintain budget deficits.

This was also fine. But when it came to financing the deficit, the ‘ completeness vs consistent' conundrum came into play.

Deficits could be financed either by taxation or by borrowing. Politicians always choose the latter.

That too is fine and borrowing can be domestic or foreign. Latin America and Europe both borrowed large amounts from foreign banks.

And that was the mistake. You can, as the Indian government always does, cheat your own banks. But you can't cheat foreign banks, especially American, German, French and British ones.

Their governments will simply cut you off at the knees and elbows through their private clubs and networks.

***

Tailpiece

When the Europeans rattled their tin cups in front of China, India was worried that it would gain huge influence there. But it made sure at Cannes that Europe will be funded only through the IMF.

China is free to pour money into the EFSF (European Financial Stability Facility), said a senior government official at Cannes, but even the Chinese government is not that stupid, he added sotto voce .

Published on March 12, 2018

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