Sunday, March 15, 2009

The Debts of the Spenders: US and Europe at the G20 Meeting

The G20 is divided into 2 camps:

1) Westerners (US and Europe)

2) Asia, Middle East, and Russia

#1 needs to continue selling bonds to #2 in order to finance their fiscal stimuli programs.

In order to accomplish this goal, #1 needs to coordinate their bond selling. The chances of initiating such a program(s) continue to deteriorate b/c the US and Europe are in danger of "crowding out" each other from the bond markets. Each has an incentive to capture market share from the other.

Anyone familiar w/the old "Prisoner's Dilemma" strategem from game theory knows how difficult coordination can be. The solution to coordination is to establish a central, supra-national body that can punish those who stray. Unfortunately for #1, pride and nationalism continue to rear their ugly heads under the guise of sovereignty and jurisdiction.

In fact, the European noise about reducing the need for fiscal stimuli programs is only a marketing trick to attract #2's investment funds by presenting themselves as more responsible spenders. There is some truth to such statements but it is merely a matter of degree when compared against the biggest profligate spender of the world, Uncle Sam.


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