The G20 countries meet each year. Normally their meetings are full of fine words resulting in little action. But at a summit in London on 2 April 2009, the fear of a deepening global recession focused minds and a package of measures worth over $1 trillion was agreed to stimulate trade and growth. This included $750 billion for the IMF to help economies in severe difficulties, $250 billion for financing world trade and $100 to multilateral development banks (such as the Asian Development Bank) to provide extra aid to the poorest countries.
The extra money for the IMF would include $500 billion of loans from member countries and £250 billion in new money – a form of international quantitative easing. This new money would be in the form of ‘special drawing rights’. These are denominated in dollars and are created by the IMF to be drawn on by countries in difficulties.
There was also agreement to tighten financial regulation and to resist protectionism. A ‘Financial Stability Board’ would be set up and work with the IMF to design a strengthened regulatory system for banks and other financial institutions and for financial markets and instruments.
The following articles look at the agreement and its likely effects.
‘This is the day the world came together to fight back’ Independent (2/4/09)
G20 communiqué: Point by point analysis Telegraph (2/4/09)
G20 summit – leaders’ statement. Full text of the communiqué Guardian (2/4/09)
G20: Economic summit snapshot BBC News Online (2/4/09)
G20 leaders seal $1tn global deal BBC News Online (2/4/09)
G-force The Economist (2/4/09)
World leaders declare war on risk Sydney Morning Herald (3/4/09)
Postscript (Sept 2009)
G20: What progress has been made? BBC News (23/9/09)
G20: Pledge by pledge BBC News (25/9/09)
Questions
- What will determine the success or failure of the G20 agreement to revive the world economy?
- Identify any multiplier effects from the agreed measures.
- Why did the French and German governments object to any further fiscal stimulus packages?
While deflation was quite common right up to World War II, it has not been seen in the UK since 1947. The podcast considers whether it might return and looks at the impact of deflation on economic activity. There is a short case study on the deflationary years suffered by Japan between 1997 and 2006 and a consideration of policies that might be appropriate to overcome defaltionary pressures.
Governments and central banks around the world are trying hard to minimise the impact of the economic downturn on their economies. One means of doing this is to cut interest rates. The aim is to boost aggregate demand by giving people more disposable income and making borrowing and investment cheaper. But how responsive will people be to the interest rate cuts? The articles and podcasts below look at the issues.
Combating the recession The Economist (8/1/09)
Economic downturn: ‘Interest rates may not be such a useful tool any more’ Guardian (9/1/09) Podcast
Beyond rate cuts Financial Times (15/1/09)
Beyond retail therapy Guardian (8/1/09)
Uncharted territory for interest rates BBC News Online (8/1/09)
Latest cut in interest rates will not revive flagging economy Times Online (9/1/09)
Interest rates – the setting of the LIBOR rate BBC Biz Daily (9/1/09) Podcast – Tim Harford
Questions
- Explain the process by which lower interest rates boost aggregate demand.
- Explain what is meant by the LIBOR rate. Listening to the BBC Biz Daily podcast above may help in answering this.
- Assess the importance of the LIBOR rate in determining the levels of borrowing and investment in the economy.
- Discuss the relative effectiveness of fiscal and monetary policy in boosting the level of aggregate demand in the UK economy.
Economists never like to use simple words when there are more complex ones available! So, the new term for printing money is ‘quantitative easing’. This refers to deliberate increases in the money supply aimed at preventing deflation. The real concern is whether quantitative easing will stoke up inflationary pressures for the future – the balance between inflation and deflation is a fine line to tread. Quantitative easing becomes necessary when there is danger of deflation and interest rates have already been cut as far as is possible.
Another problem, in the short term, is that an increase in the monetary base may have little effect on broader money (M4 in the UK) if people do not want to borrow and thus credit creation is limited.
The articles below all look at various different aspects of quantitative easing.
Europeans Disagree Drastically On Fed Rate Cut Deutsche Welle (17/12/08)
Financial crisis: Free money coming your way! Telegraph (17/12/08)
Wondering what on earth Nils was on about? He’s written this for you BBC News Online (PM programme) (18/12/08)
Japan forecasts no growth in 2009 BBC News Online (19/12/08)
New economic policy: If you haven’t got enough of this stuff, just print some more Scotsman (18/12/08)
Ground Zero The Economist (18/12/08)
Fed throws out the rulebook Times Online (18/12/08)
Quantitative easing: the modern way to print money or a therapy of last resort? Telegraph (8/1/09)
Forget hard choices. We need pampering Times Online (18/12/08)
Jeremy Warner: Darling wants say on ‘quantitative easing’ Independent (8/1/09)
Questions
- Define the term ‘quantitative easing’.
- Explain the mechanism by which the monetary authorities can implement a policy of quantitative easing.
- Discuss the relative effectiveness of cuts in interest rates and quantitative easing to boost aggregate demand in a recession.
- Analyse the impact on an economy of a prolonged period of deflation.
Sir Alan Walters, one of Mrs Thatcher’s key economic advisers, has died at the age of 82. Though he always tried to shun media attention, Sir Alan attracted a considerable amount of it when he clashed publicly with the then Chancellor, Nigel Lawson, over the Exchange Rate Mechanism (ERM). When faced with the choice from Nigel Lawson that either Alan Walters went or he did, Mrs Thatcher famously chose her adviser over her Chancellor. This lent Sir Alan a degree of infamy in economic circles and he is perhaps known best as one of the most influential monetarists of the period. Sir Alan was an early advocate of money supply targeting and always argued that the money supply should not be manipulated for political reasons. His advice was also key in the budget of 1981 which raised taxes in the middle of a recession, something that in this current recession would appear to be unthinkable.
Thatcher’s economic guru dies Independent (6/1/09)
Nigel Lawson and Thatcher’s guru in a political bloodbath Telegraph (5/1/09)
Mrs Thatcher always agreed with Alan Times Online (5/1/09)
Thatcher pays tribute to Walters BBC News Online (5/1/09)
Thatcher economic adviser Walters dies The Herald (6/1/09)
Sir Alan Walters, Thatcher’s economic guru, dies aged 82 Times Online (5/1/09)
Sir Alan Walters Telegraph (6/1/09)
Mrs Thatcher’s monetarist guru The Economist (6/1/09)
Questions
- Write a short paragraph setting out the key influences of Sir Alan Walters on economic policy in the 1980s and 1990s.
- Explain what is meant by money supply targeting.
- Discuss the effectiveness of money supply targeting in combatting inflation in the 1980s.
- Examine whether money supply targeting might once again be an effective tool in the monetary policy ‘armoury’.
