Is the world catching on to the fact that borrowing and spending isn’t working?
Finance ministers of the G20 have made clear that expansionary fiscal policy is no longer sustainable or effective in fostering economic recovery. As if to reinforce the idea that raising additional revenues to tempt further spending isn’t prudent, the G20 this weekend also scrapped ideas of a bank tax (affirmation of support for Basel III rules to be in place by November continues).
While some market observers may see this as stating the obvious, there are still fears being expressed by, among others, US Treasury Secretary Geithner that reversing course on spending now will doom recovery of economic growth in key regions, starting with Europe. If governments heed the G20’s call for fiscal repair, this will leave monetary policy to foster growth.
Unfortunately, the current monetary policy situation, as viewed from the US, offers near zero rates of return on investment; so unless we want to see the world continue to follow the example of Japan, there is mood for a change of course here, too.
So, while the G20 emphasizes fiscal and financial system repair in its communiqué from the weekend, it can offer only happy talk about growth: “The global economy continues to recover faster than anticipated, although at an uneven pace across countries and regions.” For how long can policymakers say this with a straight face without pointing to growth-inducing policies that people believe they are seeing working? The G20 finance minister know that the world needs them: “The recent events highlight the importance of sustainable public finances and the need for our countries to put in place credible, growth-friendly measures, to deliver fiscal sustainability, differentiated for and tailored to national circumstances.”
Meanwhile, the month of May saw the least amount of bonds sold by corporates in a decade, after a period of repeated records set for issuance. Treasurers must be concerned about government debt crowding out their access to capital at some point, so a pull-back now means that there are also concerns about use of proceeds. The G20 statement of the obvious is a good sign for the former, but what about the latter concern? If changes in monetary policy are the next shoe to drop on the economic recovery, then cheap debt can no longer be relied upon to paper over poor returns. Treasurers in both the private and public sectors want to see more cash flow and they need policy makers to come up with better ideas to make his happen.