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We'll miss ya ol' G8

London will host the G20 meeting of global leaders this week, and in anticipation of the event five people reportedly found with weapons, suspicious devices and extremist materials were arrested under anti-terrorism legislation.
As for the talks themselves the big issues will revolve around the nascent and emerging new global world order. This is something weve discussed before in Canadian Business. Whatever way you slice it, looks like the G8 is dead and the new challengers to U.S. economic supremacy, China and India, are set to spread their wings under this new G20 format.
The Middle Kingdom offered up a hint of where these talks may go in the years ahead when it mused a week ago about the need for a new global currency mechanism that would eventually replace the U.S. dollar as global currency of last resort. Timmy Gheitner, US Treasury Secretrary rejected that idea. But this is all very interesting. What were seeing here is the very budding of the future international order, and in that alone these meetings will be fascinating to watch.
But global macroeconomic trainspotters will also want to keep an eye on the side-dispute between the U.S. and Europe over the proper form that stimulus spending should take. To overly simplify the differences it looks like the Euros are skeptical about the need for more stimulus; the Americans would like to see more.
Which side is getting the response to this economic crisis most right? Thats impossible to say. Well see in the year ahead. But its worth noting how these two regions came to their respective positions. Paul Martin, the former Prime Minister of Canada, recently spoke at a Canadian Businessmagazine economic outlook event, and in his address suggested that the differences between Europe and the U.S. can be traced back to their differing experiences in the 1930s.
In the U.S., the most damaging outcome of the Great Depression was the debt deflation that destroyed paper wealth and dumped the industrial sector into the tank. American officials have never forgotten that and so their natural impulse is to err on the side of more stimulus. Stopping Great Depression-like debt deflation from taking hold is public-policy aim number one and so no wonder the Americans want to apply as much stimulus as possible.
Over on the other side of the Atlantic, however, the Euro-mindset was scarred by the experiences of hyper-inflation, which wiped out the German middle class and led to the rise of Hitler, and eventually the Second World War. The painful lessons of that time, inflation, still lingers in the “national mind” and manifests itself as a more hawkish stance on inflation. And so naturally the deep impulse of the European politician is to be extremely careful about anything that might lead to inflation.
Who should we listen too? That’s hard to say. Both sides address different angles of the same problem. Not providing enough stimulus now could see deflation take hold and that would hurt. But too much stimulus could be setting us up for a big round of inflation once we get through the near-term mess. And so both sides have good points. The stakes are equally dire at either end of this spectrum. Let’s hope the differences can lead us to the right middle path.
Let’s hope as well that protesters don’t blow the whole thing up. That would seem to guarantee a tragic outcome no matter how much stimulus is applied (or not applied). We’re already seeing stock indexes sell off in advance of the meeting (and, no doubt, as a result of the ongoing problems in the auto industry). One shudders to think what some kind of bomb would do to markets.
Whatever the case, it’s clear the stakes around this meeting are higher than they’ve ever been. As the world gets ready to gather in London it is fascinating to see these deeply embedded impulses rise to the surface. But as for who will eventually be proven correct, thats impossible to say. History repeats itself, sure, but its never quite the same is it. And so we don’t really know what the perfect answer is. We’ll just have to hope it all works out. In a way, it almost makes one pine for those old G8 meetings of yore, you know the ones back in the late ’90s when the world economy was flying, the economic ducks were in order, and it was a challenge to get anyone to pay attention. Leaders then seemed almost desperate to come up with something interesting to talk about. Ah, the golden years. Those were the days weren’t they.