At the Group of 20 summit, U.S. President Barack Obama not only charmed other world leaders but also secured a commitment of new money for the International Monetary Fund.
Responding to Obama's suggestion that the London gathering might mark the beginning of an end of the crisis, stock markets extended their rally. World equities have risen by more than 25 percent since early March, and the RTS Index is up 50 percent since late February.
But measures adopted so far won't even put a floor under the crisis. They will only slow the pace of the decline, because sources of eventual new growth have not even been identified.
Boosting the IMF is necessary to save previously booming economies such as Mexico, Poland and the other dominos that may soon tumble. But only a few countries, including Japan, China and Russia, can contribute real money -- their excess savings. The United States and Europe will be borrowing whatever they bring to the table. In other words, emerging countries that no longer have access to capital markets will be supported by debt taken on by rich nations that can still borrow.
This is not an effective way to keep the world from sliding into a depression. It is not even a finger in a dike, but rather more like hosing the breach, hoping that a jet will keep the water from leaking through. It may work for a while, but in the long run it will make matters worse.
This is the same model that Washington has adapted for the domestic economy. With U.S. consumers no longer able to borrow, consumption shrank by an annualized $250 billion in the fourth quarter. Since then, more than 2 million additional jobs have been lost. Instead, the U.S. government will boost aggregate demand with its own borrowing. This year's deficit will run to $1.8 trillion.
But even Washington can't go on borrowing and spending forever. Job losses will eventually moderate, but the U.S. unemployment rate will still hover around 10 percent for a while. When the money runs out, the unwinding of global production capacities that were built to serve bloated credit-financed demand is inevitable. The crisis for producers of goods, such as China, and commodities, such as Russia, will worsen.
G20 leaders plan to reconvene in the fall -- perhaps in time to deal with the second leg of the crisis. Meanwhile, Russia should not be eager to contribute any of its dwindling hard currency to bolster the IMF. It may soon need every ruble for its own needs.
The Moscow Times