The Global Public Spending Initiative

8/14/2019 The Global Public Spending Initiative

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The Global Public Spending Initiative

Table of Contents

The hour of global policy has arrived right now .............................................................. 2

1. Monetary policy has reached an impasse and is not effective enough any more

against this crisis................................................................................................... 2

2. Fiscal policy (i.e. Public Spending) is now ineludible ......................................... 3

3. But nowadays, any Public Spending Policy has to go Global.............................. 3

4. But if it has to go Global, then political leaders might need to live up to resolve a

multilateral prisoners dilemma............................................................................ 4

5. And, still, the situation urges a global political agreement .................................. 4

6. Thus, current situation requires an immediate arrange for a effective political

summit devoted to Global Public Spending ......................................................... 5

7. Any potential reform of financial system is also an inexcusable point, but it may,or may not, be part of a summit devoted to the main point: Global Public

Spending Policy.................................................................................................... 6

8. The appointed G-20 summit in November is not enough nor the sole big priority

any more, a Global Public Spending Summit has precedence, and some relevant

political leader(s) has(have) to say it so ............................................................... 6

9. An extra consideration: pre-existing formats and byzantine theoretical-

ideological economic debates are luxuries we cannot allow for right now.......... 9

10. And finally: if you happen to think (once again?) that the worst is behind, please

think it twice ....................................................................................................... 10

Copyrights Luis Castro Prez & Moiss Martn Gonzlez, 2008. All Rights Reserved.

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economical position whatsoever maintained by any national government, political

leader(s) or representative(s), political party(ies) or private productive or financial

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this text are the sole individual private responsibility of both authors. His sole objective

is to make known his opinions and, if they are found useful, try to reach those who

could consider them and apply them for the benefit of all.

Contact info:

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GPS Initiative - 2/11

The hour of global policy has arrived right now

At the present moment, the financial and economic crisis has reached a point in which it

has turned into a strictly political problem, and one of a multilateral nature.

As a European initiative and hosted by United States, a political summit of G-20

countries has been arranged to be held in Washington next November 15th. The stated

objectives of that summit are:

- to review progress being made to address the current financial crisis

- to advance a common understanding of its causes, and

- to agree on a common set of principles for reform of the regulatory and

institutional regimes for the worlds financial sectors

Those objectives have yet been overtaken by the economic developments.

Along with this one and as soon as possible, a new, different and comprehensive

summit needs to be summoned that have a real global scope, in order to reach anagreement on a Global Coordinated Public Spending Policy.

The current crisis has reached a stage in which any possible way to a practical solution

seems to go through summoning and working out a summit like that, and now it is a

strictly political question.

Not to undertake that Global Public Spending action would mean to accept a terrible

and long lasting global recession, when no one can dare to rule out with enough

certainty the possibility of it lasting more or even much more than expected, and with

all its probable as well as possible collateral and subsequent consequences. No one

should choose to leave it unfixed and see what it happens, because if you wait to seewhat it happens, probably then it will be too late, too difficult to correct it.

Thus, not taking action now is not an option.

Let us review in detail the essential points of the situation as it presents itself at this very

moment and why are we saying this.

1. Monetary policy has reached an impasse and is not effectiveenough any more against this crisis

Monetary measures had to be tried, and indeed have been tried -and still is- with a

remarkable level of energy, creativity and agility. Not a single critic intended.

Unfortunately, the best efforts in this direction have not got the crisis solved, but instead

the whole situation has evolved towards stagnation under the form of a huge liquidity

trap. LIBOR rates are misleading. The bitter fact is, despite those measures and a huge

capital injection, that bank lending is not resuming at anything resembling normal

levels at all.

Monetary policy can be boosted to its limit, and this can render two possible results: (a)failure in reinflating prices thus making the grandmother of all liquidity traps, or (b)


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success in reinflating prices but with a too high a risk of rendering the whole situation

as a global stanflation (stagnation + inflation) which would dwarf that in the 70s.

Thus, now it is the right time to consider boosting that other tool, fiscal policy.

2. Fiscal policy (i.e. Public Spending) is now ineludible

Fiscal rebates are less effective than public spending.

Fiscal rebates so far have proved to be insufficient as they have been caught also in a

liquidity trap.

This liquidity trap is compounded of high levels of indebtedness and also because a

growing deflationary expectative.

Public spending is the tool of choice now, and that poses the whole problem as a strictly

political decision. It does not depend on citizens, corporations, nor on private or centralbanks.

3. But nowadays, any Public Spending Policy has to go Global

Before globalization, a given country still could achieve unilateral success resorting to a

public spending fiscal policy.

But nowadays that is not so easy any more: whatever public effort, whenever it is

started unilaterally because of not being aware of this fact, would tend to dissipate its

potential benefits for the country who undertake it because of globalization. This wouldpotentially (and probably) confer a share of the beneficial effect to other country(-ies)

even if they are not undertaking that kind of effort.

Even if undertaking it knowingly of this fact but disregarding it out of sheer generosity,

we should point that (a) it still would not be fair (b) we suspect that it would create

unsuspected unbalances when we are well served of them and there is a need to start

reducing them, and the most important (c) it would be a sub-optimal tactic in a moment

when every country and economic region in the world needs to optimize their economic

efforts more than ever.

Thus, unilateral Public Spending tactic policies, whether from a single country -being it

big or small, or from one or two big economic region(s), are sub-optimal and even a

potentially risky strategy.

Globalization conveys that financial and economic crises become global more easily

than ever.

Globalization also conveys that, more than ever, solutions and specifically Public

Spending policies- have to go ineludibly Global.


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4. But if it has to go Global, then political leaders might need tolive up to resolve a multilateral prisoners dilemma

Confronted with the need for a global public spending policy, political leaders will have

to live up to cope and solve to mutual common benefit a multilateral prisoners

dilemma. That is their challenge. No more, no less. And they can success.

In prisoners dilemma, essentially, a situation is set in which: if both parts cooperate,

both parts achieve gains. But there is the option of one of them defecting from the other

part (betraying the needed agreement), thus achieving some advantage for oneself at the

expense of the other.

In the present circumstances, all of us are prisoners of a crisis that is global in nature.

And at this moment each country (and its political leader) potentially may find

themselves as a prisoner of one or more among a series of unilateral interest factors, one

or more among:- Idiosyncrasies in his home country economy (i.e. level of national debt and others)

- Non economic political factors (i.e. geopolitics)

- Uncertainty about interests and intentions of the rest

- Individual factors, internal political factors, neighbourhood factors

- and a more or less extended etcetera

But at the same time each and every one of them are and should be fully aware that the

common enemy, i.e. global economic downside risks, is not going to let his/her country

unaffected, but leaving the situation unchecked should strike badly their countries and it

also should strike badly the other countries, so there is a need to all political leaders

contributing to a common, conjoint action.

At the present moment, political leaders and they only as public representatives bear the

responsibility of sorting out any potential multilateral prisoners dilemma in such a way

that:

- some renounce about some unilateral active or advantage might to be accepted

- global benefit is maximized and global injuries because of the crisis are limited

for every one

You would better sort it out, and soon, or instead

- assume the responsibility for a potential world bankruptcy, a long lasting

recession and a global failure

5. And, still, the situation urges a global political agreement

Current global financial and economical crisis has a very dynamic destructive nature.

It runs fast and furious. So far it has impacted fully with the US as epicentre, through

financial asset backed securities and derivatives, then in Japan as epicentre through

unwinding of Japanese yen carry-trade. Now there is an increasingly risk of it being just

a question of time before it strikes fully Western Europe as epicentre through someemergent economy(ies) defaulting the loans its banks have lent, but this potential third


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strike would come as the world economy, and that of Western Europe as well, are yet

weakened by the former two.

Even maritime trade is in an increasing risk of becoming to a halt, not only because of a

huge downturn in the global aggregate demand, but even the remaining deals with a

seller and a buyer willing to close the deal are being prevented to do so because of the

credit crunch.

Monetary policy and rescue measures have been fast, creative and agile, especially in

the US, also in Western Europe. But regretfully the crisis dynamics has rendered it

stagnated, blocked in a huge liquidity trap. Banks are not resuming lending. Credit

crunch persists. Real economy is suffocated. Citizens spending is retracting.

Deleveraging/unwinding is at best completed halfway. In summary, the essential

mechanisms that gave rise to that fast and furious onset are still alive and could kick

again at any time. And with much the same strength and speed.

Global public spending fiscal policy, in contrast with that fast and furious pace of this

deleveraging, Big Unwinding crisis of our time, needs Time:

- a multilateral politic negotiation process necessarily demands time

- once achieved such an agreement, to implement the measures and the necessary

supervision of its implementation necessarily demands time

- once implemented, the manifestation of the expected benefits necessarily

demands time

Thus, the earlier all of it is started, the better. All the responsible leaders need to be fully

awake to this situation, to the needed task, and start moving. Time is not a luxury world

population can count on.

6. Thus, current situation requires an immediate arrange for aeffective political summit devoted to Global Public Spending

As nowadays a public spending fiscal policy necessarily has to go global, a summit is

needed that goes the most global that is possible in practice.

If it is a G-50, that would be better than a G-40. If the leaders summoned represent a

90% of world GDP that would be better than if they represent a 70% of it.

This summit needs to be accorded. An agreement has to be advanced and reached. Not

to summon it and reach it is not an option. And it is urgent because crisis is fast. Andagreements and implementation are slow.


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7. Any potential reform of financial system is also aninexcusable point, but it may, or may not, be part of asummit devoted to the main point: Global Public SpendingPolicy

A sound reform of the international financial system is also an inexcusable task.

Financial sector is the hearth of economy. And money and its use, despite being

depicted and something cold or materialistic, it is the material form of literally

millions of day to day efforts and dreams of millions of people around the world who

earn it with its daily hard work, for themselves, for their families, relatives and countries

of origin.

You just dont leave your own heart unchecked, or leave it carelessly under any kind of

bad external or internal influence. You shouldnt.

So you should regard the financial system, whether you are a politician, a financeminister, an economist or just another conscious citizen. So you dont want to leave the

financial system unchecked, while you want to define, find and pick the optimal point

where there is enough regulation to have a safe and healthy economic hearth but at the

same time not so much regulation as it could suffocate it.

Nobody says nor for a moment that this is an easy task. But it is ineludible. Not to

undertake it is not an option. There are countries and regions in the world which have

experience with bank crisis. Hear all their contributions. An optimal regulation point

should be and can be achieved.

But, being this task as important as it is, being the first priority until recently, now it is

not the first priority any more as the first priority is right now a Global Public Spending

policy, being the financial reform second only to this one. Events present itself at its

own pace, and we need to move in accordance with the events.

So the question remains open about if it is convenient to integrate this financial reform,

or not, within or besides a negotiation about a Global Public Spending policy. One

option or the other should be decided, the most convenient.

But a reform of the international financial system is not the first priority any more in

terms of urgency/importance.

The first priority in terms of urgency/importance is to start as soon as possible a process

aimed to reach an almost global agreement about a global public spending policy.

Because the dynamics of this crisis are fast. And the negotiation process needs time.

8. The appointed G-20 summit in November is not enough northe sole big priority any more, a Global Public SpendingSummit has precedence, and some relevant political

leader(s) has(have) to say it so


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To achieve a widely multilateral agreement about public spending fiscal policy is a

priority of the maximum importance, urgency, and posing important objective and

subjective difficulties that requires a common effort and time to solve them.

While perhaps G-20-financial-reform format was a enough starting point given that the

world has some time, at this very moment to rely solely upon any summit format that

may have been valid before but is not sufficient now, and to devote precious time andeffort solely to it, is a luxury that worlds population cannot allow for.

It would be necessary that at least one political leader of some advanced economy, and

much better if they are more than one, state openly this new development in the state of

affairs.

In so doing, we would recover the initiative in this Financial World War. A very

unusual war that is not being fought against any country or alliance of countries, but this

time it is being fought against a common enemy of all countries but that has no human

shape. Each and every single country is challenged by this crisis.

So some one have to say that a global conjoint action is needed and indeed it has been

said yet.

But some one has also to say to the world the type of global conjoint action that is to be

set, and the dates, members and methodology that is going to be used in order to have

this plan starting to work as soon as possible. And that has to be a convincing plan.

Nothing less is valid than a convincing Global Public Spending agreement plan.

Some one could think about this being alarming. On the contrary, we are fully

convinced beyond any doubt that, at this very moment, this would be the sole and onlyfactor that could effectively put a huge stop this dangerous economic bleeding and

prevent even more potential economic and non economic problems.

We trust this strategy can make its way towards real action. Would it be difficult,

however, we think that an attitude of conformity with the group is not the right

response. Nobody should endorse an action that is deemed as insufficient. Some

political leaders in the past had to stood alone until events came to agree with their

vision. So be prepared to defend the vision you have if necessary. But again, we trust

fully that eventually a global strategy will make its way and be put in action. We would

only regret that more precious time is lost, and more losses come, before the need

become overwhelmingly clear.

When problems are small, you should think little. But when problems are Real Big, by

your soul, youd better think Big. Cool, prudent, always, sure. But also brave enough to

think big and stick to that leading idea no matter what others might say, think or do.

So it has to be said. Say it.

Now, given that the instability in the international financial structure feeds essentially

on three broken or about to be broken- pillars, that is:

- US financial securities (backed by mortgages and other types of loans)

- Japanese yen carry-trade- Leveraged loans in emerging economies (75% lent by Western Europe banks)


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Then it would be very healthy, of justice and optimal that the political leaders

eventually announcing and leading a Global Public Spending agreement strategy were:

- Representative of the United States of America (given the political conjuncture

in the States right now, may be both Interim President Mr.George W.Bush and

just elected President Mr.Barack H.Obama)

- Representative of Japan (Mr.Taro Aso)

- Representatives of Western Europe (EU+UK) (Mr.Miguel Durao Barroso andMr.Gordon Brown)

We would like to underscore as a point of specific relevance the US leadership, and this

because of several reasons. Some people might agree or not with them, or would put

them otherwise, or have others. But ours are that the US:

- is the most important economy in the world and the most flexible one, or one of

the most flexible ones.

- is the biggest economic referent, or among the biggest economic referents

- huge public debt of the most important economy in the world is a major

obstacle, or may be regarded as a major obstacle to accept such a Global Public

Spending effort (and a convincing endorsement of the US would be very

welcomed)

- current crisis started there (we do not endorse the US are the sole responsible,

and for sure they are not; but, still, public perception links the US with the crisis)

- even those who dont agree with the results must agree the recent electoral US

results have created expectations all around the world. Many people have now

fresh positive expectations about the US and this would be the kind of

constructive move that would meet those expectations.

And then, the agreement should specify clearly and convincingly:

-

a given share of GDP (5%, 15%, 10%; fixed percent, or a flexible range;whatever is better) to be spent by national governments in a given time span

- a surveillance and early alert institution or committee (IMF?) to check that (a)

every nation is sticking to the agreement, and also (b) to detect early deviations,

unbalances, unexpected developments and have them fixed in time.

- a sanction system to be sure that every government does not deviate too much

from the original plan.

- regular follow-up reports and one or more clear criterions to check that crisis is

really over, the plan has been a success and trade, markets and economies in

general can resume fully free normal rules of functioning (while maintaining the

reformed optimally balanced and safe new financial rules).

Now, this whole pack design could be improved, but something like this is what we

would call a convincing, powerful message to the financial, economic and whole world.

We would improve it in a very specific way: that of preventing this global crisis to

strike badly on the weakest of the weak, and even seizing the opportunity to start the

end of extreme poverty in the world. Note that we do not talk about normal poverty,

but about extreme poverty. Nowadays, this is absolutely feasible. The technology thatachieves it is not a leftist nor a rightist one (in fact, having being attacked by both sides,

that is a good clue that it may be the right answer). And even better, it is affordable even

in this severe downturn.

The technology exists; it was started in Bangla Desh in the midst of another ugly

recession, in the 70s. In those years, and also since then, it has been successfully stress


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and cross-nationally and cross-culturally tested with outstanding continued results. That

technology does not even need a big chunk of public international resources. In fact,

they prefer to stand as apart as possible from public capital. All of these are proven,

hard facts.

Being so, it is not a matter about which we can feel legitimate pride of ourselves as

human beings that there still remains extreme poverty in the world in a time when thereis a proven and affordable (even in this time of crisis) technology that could get most of

those extremely poor people improving their condition by coming out from extreme

poverty. Maybe for others criterion they still would be poor. But for their own, they are

not, any more. Not materially nor subjectively, as they can fulfil their most basic needs

(food, basic housing, clothing and schooling), and no less important- they make it bytheir own effort.

So we could improve the whole pack adding specific plans to agree on measures that

allow for a universal or almost universal expansion of micro-credit programs that have

been successful so far, and to review other competing public international programs that

has not.

Now, the whole pack design could be improved, but something like this is what we

would call a convincing, powerful and also very conscientious message to the financial,

economic and whole world.

Finally: of course, the world is yet badly indebted. In some countries it is a real big

problem. And to undertake even more indebtedness is an understandable matter of

concern. In the past everybody has become too much indebted, not always because of

the right reasons and in the right way. But if there is no other way, then let us allocate a

conscious and manageable extra debt, this time for the right global reasons.

9. An extra consideration: pre-existing formats and byzantinetheoretical-ideological economic debates are luxuries wecannot allow for right now

The fact that perhaps there is not a previous precedent for the required type of summit

nor G-7, G-10, G-20, not even Bretton Woods or the United Nations are really

satisfactory referents- is a completely irrelevant point.

Even more irrelevant would be any byzantine discussion about liberalism versus

interventionism, Europeans versus Americans, leftist versus rightist, and the like.

Irrelevant as well as an even more unnecessary and useless luxury.

The evolution of the present crisis has lead to de facto throwing through the window agood share of supposedly untouchable dogmata that under stress test have proven to be

completely dispensable, on the understanding that this are difficult times that call for

unusual temporal measures.

You can ponder how the US, paramount of economic liberalism, has nationalized de

facto a good chunk of their financial and productive system. The Federal Reserve hasslashed rates until close to zero. And rightly they did so. On his part, the ECB is de

facto going well beyond its theoretically only mandate to control inflation. And EU,


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once very hawkish against any public intervention on private deals and companies, has

allowed for a generalized public recapitalization of banks. And those were the proper

measures to take. Central bankers all around the world, each one with a mandate of

independency, cut rates co-ordinately. And well done it was.

But all those measures transcend any byzantine debate. And that is the right way.

Byzantines and Ottomans left us a nice lesson. Youd better dont indulge yourself in

weird intellectual debates while there is something urgent and important to attend.

So everybody, please do not mess around with byzantine ideological discussions.

Free trade, free markets and free economies are an unquestionable achievement we

human beings should feel proud for and take care of. All of us are fully aware that free

economies almost always are way more efficient than state-intervened ones.

But in order to be proud and take care of free trade, free markets and free economies,

we have to be sure that we have trade, markets and economies, to start with. And in

order to do so, as in wartime you suspend temporarily habeas corpus and other civilian

rights, in financial wartime against a non-human common enemy, you may need to

reduce temporarily the normal free economy rules. The key points here are that (a) it has

to be ineludibly temporal measures and you have to be sure of that, and (b) this is a

relatively small sacrifice intended to prevent a far bigger damage and/or achieve a far

bigger benefit.

10. And finally: if you happen to think (once again?) that theworst is behind, please think it twice

Even maritime trade is in an increasing risk to becoming to a halt under the doublewham of an awful drop in demand and worse- a credit crunch affecting letters of

credit.

If there has been a single factor contributing to evolution of human societies in history,

that has been free trades. If there has been a single factor contributing to

involution/degradation of human societies in history, it has been that of barriers,

obstacles and isolation.

On theory, everybody is convinced that this time is different. Nobody will touchinternational trade because of the lessons of the past.

But you should check the news about global maritime trade, and the problems with

letters of credit. And ponder the potential evolution of all this state of affairs in the

eventuality of stagnation longer than the consensus. Consider besides that so far

consensus prevision after consensus prevision has been beaten by the crisis. Have in

mind that only the most bearish previsions have succeeded so far, and the consensus has

had to catch up. But even those who have anticipated it better have been surprised by

the violent speed of events.

So the hope is that nobody will repeat tariffs mistakes and the like, because this time is

different. And the hope is that things cannot be worse and the worst is behind. But so

far, each time everybody thought that the worst was behind (and there have been too

many instances of that yet), then the facts have demonstrated easily otherwise.


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After all that considerations, you can rethink if all of us can safely rule out, in the long

run, the potential economical and non economical consequences of not acting now.

Will we keep on sticking to hopes and deciding to wait and see if things sort out by

itself?

Please, everybody, do not distract yourself with irrelevant details and please- pay dueattention to the need and the urgency to start and reach as soon as possible agreement on

an effective and realist Global Public Spending policy.

And to the political representatives: the present and the future of millions of people all

around the world is now in your hands. Please, be sure to make the right decisions and

look forward to a day when you can look back and remember what all of you achieved

through long and difficult negotiations.

Something like this has never been attempted before. But it is not the first instance in

which something has been achieved for the first time. And now there is a global need to

do it. Please, think Big, think cooperatively, think smart. You and your colleagues will

need to offer your best in order to free us all, you and your country included, from this

global threat.

And finally, if you think this whole picture and analysis we have composed makes

sense, then youre conscious. Even if you dont, you are also conscious.

And whoever is conscious, is responsible of acting in accordance to that knowledge, or

choosing instead not to act or to act differently. We have decided to act. Now it is your

turn, respectable reader. If you dont agree, criticize it. But if you happen to agree, take

at least some minutes to think how this can reach the economic responsible leaders whomight put it into real action.

This is not a game. We cant change channel. This is the real thing.

Go ahead.

Luis Castro (Economist) & Moiss Martn (Psychologist)

Madrid (Spain) - Sunday, Nov 9th 2.008

The Global Public Spending Initiative

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