When a nickel is not worth a dime

By Tula Dlamini

For a few brief, shocking moments on 28 March 2009, the contradictions that underlie the global economic crisis surfaced into plain view as UK Prime Minister Gordon Brown declared ‘the death of the ‘Washington Consensus’ in favor of a ‘New Consensus’.

It nonetheless took a nifty effort by G-20 Finance Ministers and Reserve Bank Governors from Washington, Europe and Asia to downplay Gordon’s assertion in a joint statement. The official statement reiterated commitment to restoration of lending by tackling problems in the financial system, through continued liquidity support, bank recapitalization and dealing with impaired assets. In addition - as the summit ended on 3 April 2009, the G-20 leaders collectively pledged more than $1 trillion in emergency aid amid a financial crisis that has plagued every corner of the world.


Image by google

Nevertheless, despite the public posturing by the leaders, angry demonstrators spoke their plain truth. Tear gas canisters exploded, protesters pushed back riot police; and as if taking a cue from the protests, the official leader of the Washington delegation, President Barack Obama entered the fray, confirming Brown’s earlier tocsin.

“If it were just Roosevelt and Churchill sitting in a room with a brandy, that’s an easier negotiation” Obama told the press – adding; “But that’s not the world we live in, and it shouldn’t be the world we live in.”

To spend or not spend

At the heart of the G-20 fissure – was the opposition to news that America would pump trillions of US dollars into its economy to combat the widening global recession. The rotating president of the European Union, Mirek Topolanek called the plan the “road to hell.”

Prompted by fear that America’s appetite for spending will undermine foreign reserves – mostly stored in US treasuries, bonds and other such instruments, Zhou Xiaochhuan, Governor of the People’s Bank of China was next to register his apprehension in published essay - openly suggesting the implementation of an International Monetary Fund currency to replace the U.S. dollar as the world’s currency reserve.

As it now seems – some American citizens are equally uncomfortable with the proposed government spending strategy. They ask where the government hopes to get the money from. Will the government simply resort to printing the money instead?

Zimbabweans, Argentineans and other nationalities who have experienced hyperinflation will tell you – that printing money is just taxation in another form. Rather than tax the people of their money, government reduces the purchasing power of money.

The Paradox of thrift

Exactly how President Obama and the US treasury hope to raise the stimulus packages for direct expenditures is not clear. What is certain is the close fit between current US government thinking with something approximating ‘the paradox of thrift’, an economic theory once propounded by John Maynard Keynes. The paradox states that if everyone saves more money during times of recession, then aggregate demand will fall and will in turn lower total savings in the population because of the decrease in consumption and economic growth. According to this logic, spending is thus viewed as a necessary antidote for restoring growth.

Economists who oppose Keynes’ theory often highlight two points of departure. First, if demand is reduced, prices will fall (not withstanding government intervention), and the resulting lower price will stimulate demand. Second, and perhaps more important, savings represent funds that can be extended as loans and this can effectively result in the lowering of interest rates, which in turn stimulates borrowing. Thus, consumer saving or a decline in consumer spending is counter-balanced by an increase in spending by institutions such as banks and other venture capital enterprises.

However, while Obama’s extraordinary call for stimulus liquidity now seemingly backed by the G20 leaders may temporarily lessen the effects of the recession, it may be worth considering other likely unintended consequences? Individuals, including some American citizens and countries whose foreign reserves are stored in US Dollars are worried by the ‘specter’ of a ‘nickel’ costing more than a ‘dime’. Such currency devaluation could render lifetime savings and many a country reserves worthless.