How Wide is the Atlantic?

The leaders of the G-20 (the world’s economic powerhouse nations) will begin deliberating the global response to this managed depression starting on April 2^nd. We’re watching pronouncements from Washington, particularly from our regulatory agencies, about a new world order. Treasury Secretary wants the power, much like that accorded to the FDIC regarding its member banks, to take over and restructure ailing companies – particularly in the non-bank financial/insurance sector – and expand regulatory power over previously largely unmonitored hedge funds and private equity, anything big that can impact the economy.

The timing of this escalating “corporate governance” rhetoric is not fortuitous. It is an obvious, if not anxious effort, to find some degree of commonality between stimulus-averse mega-European powers who, for the reasons discussed later, think that the U.S. efforts to use direct government intervention to create jobs and save companies are a recipe for inflationary disaster. Instead, Europe will try and steer the main focus of the G-20 summit in London away from the American prescription of “more stimulus packages” to the European mantra of “more regulatory oversight so this mess can never happen again.”

It is interesting to explore why there is such a rift between the U.S. and its European allies over what needs to be done to begin a global “fix” of the markets. I’ve cited the historical reasons in an earlier blog, but it bears repeating: after World War I, the triumphant allies so drained loser-Germany’s coffers under the guise of seeking reparations that inflation skyrocketed and literally destroyed the German economy, enraging its citizens. It was in this economic maelstrom that Adolph Hitler was able to rabble-rouse and come to power, the direct cause of World War II, which devastated Europe infinitely worse than had the preceding Great Depression. Europe remembers this debacle as if it were yesterday, and rampant inflation (which comes with creating massive deficits for massive stimulus packages) is viewed as worse than deep dark economic contraction.

There is also resistance to President Obama’s call for more stimulus spending by other governments because some of these nations believe they’ve already committed enough funds, relative to the size of their economies. “Indeed, in terms of immediate stimulus, according to calculations by the International Monetary Fund last month, Germany has committed to stimulus spending this year equal to 1.5 percent of the country’s gross domestic product, compared with 0.7 percent in France and 2 percent in the United States.” March 27^th NY Times.

Some European economists see the U.S. package at creating longer-term infrastructure but doing very little for incentivizing consumers to spend money now. They contrast this direction with, for example, a German cash subsidy to trade in old cars for new ones that resulted in 22% more vehicle registrations last month than from the same month in 2008.

But there are other socially relevant reasons why Europe may not actually need the same kinds of “stimulants” that President Obama believes America is required to restart our economy. And much of that has to do with the social “safety nets” that have been in place in Europe for many years that still do not exist in the United States. Workers are better protected with vastly higher unemployment benefits and have healthcare through the national governmental programs. So they are not as hesitant to spend when money does come their way, because they know that the basics are covered… hardly the case in the U.S.

French and German citizens didn’t have the same subprime real estate bubble we experienced (the don’t have the same level of a housing meltdown), and very few people have their retirements tied up in any way with the stock market. So with retirement income secure, there is much less fear in these larger, more stable European nations, not the case with the economies of eastern Europe and even mainstream European Union nations like Spain or Greece.

American policy-makers suggest that Germany and France are about to get a belly punch as the contraction about to hit Europe could contract the bigger economies by 6-7%. With France and Germany feeling the impact of the downturn last, the Washington officials argue, they seem to be underestimating the inevitable body slam that has crushed so much of the rest of the world. Without getting more “stimulants” into the local economies, Washington maintains, they simply are not prepared for what is to come… a problem for the entire global recovery.

But for many in the world, this economic mess is a product of following what many believe was the American ideal of capitalism. As the world markets have plunged, so has America’s ability to serve as the global economic leader it once was. Our legendary and historical cries for free and open trade are increasingly falling on deaf ears. While the world still buys into President Obama’s charismatic presentation of American ideals, it is equally clear that the perception of America has materially been changed.

The March 28^th NY Times: “‘There is a direct challenge under way to the paradigms that America has been trying to sell to the rest of the world,’ said Eswar S. Prasad, a former China division chief at the International Monetary Fund. The American banking collapse, which precipitated the global meltdown, has led to a fundamental rethinking of the American way as a model for the rest of the world… ‘Emerging markets now think they can do what they want without hectoring from the United States’”

Lots of theories, the big test is still to come, but it will be fascinating to watch the exchange in London starting April 2^nd. You may not know it, but your future well-being could certainly be determined by the decisions that begin with this G-20 summit.

I’m Peter Dekom, and I approve this message.