G-20 richest nations still lack a ‘Plan B’

Financial Events


D'turn 2Nov12.png
Hands-up those who remember the G-20? Well done, Mexican readers, you get full points. But other readers seem doubtful. This weekend the world’s Finance Ministers were meeting in Mexico City, as the country concludes its G-20 presidency. But you wouldn’t know it from the rest of the world’s media coverage.

How different from April 2009, when the world’s leaders met in a blaze of publicity to ‘save the global economy’. Then they vowed to do ‘whatever it takes’, just as Mario Draghi repeated recently on behalf of the European Central Bank. This time, however, neither Draghi nor US Treasury Secretary Geithner attended. Nor did China.

Unfortunately, the leaders tried to solve the wrong problem in 2009. They assumed the financial crisis was a liquidity crisis. So they flooded the world with cash, as the 4 orange arrows show on the chart above. This pushed up asset and commodity prices very sharply. But the crisis was not a cash-flow issue. It was a solvency issue. The debts built up prior to 2007 will never be repaid.

The blog’s great concern back in April 2009 was the lack of a Plan B. After all, it was just possible that the blog and others might be right about the solvency issue. Governments should therefore have prepared a back-up plan, just in case. But they preferred to believe their friends in the financial community, who assured them it was now back to ‘business as usual’.

So now we are 4 years into the Crisis. And it is becoming clearer day by day that the problems have not been solved. In fact, the G-20’s ‘solutions’ have made things worse, not better. Adding more debt and pushing up commodity prices has simply destroyed demand. Most worryingly, there is still no Plan B. And so now key players just stay at home when the G-20 meets.

The chart shows benchmark price movements since the IeC Downturn Monitor’s 29 April 2011 launch, with latest ICIS pricing comments below:
HDPE USA export, purple, down 20%. “Producers attempted to push some excess material into the export market, but export demand remained weak”
PTA China, red, down 18%. “Negative margins and limited supply because of continued production cutbacks”
Naphtha Europe, brown, down 15%. “Outbound arbitrages remain closed, requirements for naphtha limited, and refineries #are# coming back online following the maintenance period”
Brent crude oil, blue, down 13%
Benzene NWE, green, up 4%. “Continued restrictions on pygas, as crackers use lighter feedstocks amid bullishness for oil prices”
S&P 500 stock market index, pink, up 4%


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