The G8: The World Economy’s Biggest Brake

Posted by Jeff Rubin on July 7th, 2010 under SmallerWorldTags: , , ,  • 4 Comments

If it’s true that the economies of the EU and US are headed for a double dip, what will put them into a second recession is exactly what got them out of the last one.

Only a year ago, G8 leaders were congratulating themselves as their coordinated stimulus packages jointly lifted their economies out of the worst recession of the postwar period. A year later, at their recent summit in Toronto, that virtue has suddenly become a vice. They have all pledged to halve their deficits over the next three years, some through brutal budget cuts.

The problem, of course, is that precious few of those economies could survive without fiscal life support, let alone swim upstream against a torrent of huge budget cutbacks. Of late, the major Western European economies have hardly grown at all, and even those economies that have seen a modest recovery, like the US’s, now show widespread signs of weakness, just as many of President Obama’s stimulus measures are about to run out of gas.

Energy- and resource-rich member states like Russia and Canada are the exceptions, benefiting from the ongoing industrial revolutions in China and India, and the lift they give to commodity prices. (If the OECD still accounted for three quarters of world oil consumption, as it did in the mid-1990s, would oil still be trading at over $70 per barrel?)

Simply turning off the stimulus tap risks halting economic growth in most developed economies today. But clobbering yourself with the type of austerity budgets passed in the UK and Greece is a sure-fire way to get your economy shrinking in a hurry. In the UK’s case, the budget will take out as much as 6 per cent of GDP over the next three years, including a 2 per cent cut next year. Greece has pledged even more, sacrificing a tenth of its GDP on the altar of deficit reduction.

How long governments can stick to this scale of fiscal austerity remains to be seen. Bond markets should rightly question their staying power once the economic toll starts to show where it really counts—job losses. But at the same time, growth-snuffing fiscal action may not cure budget deficits as readily as bond traders expect.

Another recession’s hit on on tax revenues could overwhelm the impact of even the cruelest of spending cuts, leaving your bottom line no better off, and possibly even worse. And the chances of your economy being bailed out by strong consumer demand abroad fades with every trading partner who takes the same fiscal path you have chosen.

It looks more and more as though the G8 nations (or at least the core G6, excluding the petro-states of Russia and Canada) will become stagnant economies hauling huge fiscal burdens. What was once the engine of global economic growth is now its biggest brake.

  • Msusmani

    very true… was unsustainable in the first attempt and will remain so…governments should not be allowed to change the rules of market economics.

  • DennisP

    What I don't understand is where the (invisible) bond vigilantes came from? Why has deficit reduction become so swiftly the conventional wisdom? There is not even a hint of inflation and interest rates have fallen, if only slightly. The policies being mandated and implemented will very likely take us into a second recession that perhaps will be worse than the first one.

  • Steve

    A double dip recession is optimistic. A full depression is a more likely result of the current variables, events and conditions. The US and most of the rest of the industrialized world attempted the same recovery from 1929-1932. It worked just about as well then also.

    That said, a recession is a correction while a depression is a change agent. This country needs radical change … everything from massive return to agriculture and manufacturing to less consumption of just about everything.

    Thank you Mr. Rubin for packaging the data and presenting it without spin. Your glint of Canadian humor makes the facts of the situation somewhat less painful.

    Are you driving your last gasoline powered car? (

  • Dave Scott

    Remember the total Keynesian economic stimulus money spent so far is only 6 to 8 percent of what was spent on the bailout of banks.