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Megatrends – the rise and rise of the G20

First Published on 17 February 2009 on Facebook

One of the current themes is how the G20 has become far more significant than the G7. Consider, for instance, that:

• China overtook Germany in 2007 to become the world’s third- largest economy, new data showed (Jan 09)
• China passed Japan as the biggest foreign investor in U.S. government debt (Sept 08)
• China, Russia, Brazil and India together hold about 41 percent of global foreign-exchange reserves
• Saudi Arabia produces only slightly less oil each day than all the G-7 countries together

Over the last decade, we had a perverse situation. The USA, the worlds biggest superpower and most developed economy, borrowed money from the global financial system, which means that it outbid developing countries for access to scarce capital.

Had developing countries enjoyed a greater share of the capital base, we might have seen more investment in their infrastructure (accepted we might have also seen increased embezzlement - though probably on a smaller scale than Bernie Madoff’s ponzi scheme). Instead the US consumer was showered with easy credit, and spent like a drunken sailor. Economies the world over prospered, and we believed that we’d never had it so good. Even Gordon Brown looked good.

The party finally ended and the hangovers are severe. Despite this morally outrageous diversion of funds into the US, where it was poured into a hole in the ground and has now been covered over, many of the USA’s non-traditional trading partners were able to prosper from its profligacy.

Set against the backdrop of a US economy that is now crumbling at its core, it appears that the BRIC countries (Brazil, Russia, India and China) leveraged this opportunity to supply products and resources to the US, which allowed them to build up empires that are now highly significant.

The G7 are now conscientiously courting the attention of these new power brokers. Their dream is that these sovereign wealth funds, including those of their former enemies, can be diverted into their domestic economies to mend their faltering institutions and restore the former order. They count the days until they can retake their seats at the casino tables, and the music can play again.

This shift in power from the G7 to the G20 is one of the biggest megatrends since the Berlin Wall fell in 1989. Future historians will be able to express it quite eloquently, though today we are still to close to the events to comprehend with any perspective how a decade of uninterrupted growth in developed countries ultimately led to their demise.

The British will probably conduct a formal investigation into how this all could have happened. Not in order to benefit from the insights, so much as to manage the disconnect in the public psyche: They still believe that they are the greatest nation (what nation doesn’t?) and that they rule an empire, yet they show intense discomfort when asked to point to some evidence of this. Will Lewis Hamillton do?

Oceans rise and empires fall. Perhaps we will live through both of these. Whatever lessons there are, the US will have to find its own cathartic way of dealing with its transition from superpower, and briefly hyperpower, to insolvency within the term of a single President. Generally the first phase is anger, and the second is denial. Public anger against the greed and self-importance of the Wall Street banks is beginning to mount, although it will take some time before disorganised activists can land any decent blows on the slick PR machines of the former masters of the Universe.

Returning to the G7, the great risk we face is the denial phase. At a recent luncheon with Barclays economist Henk Potts, an enlightened question was "How much money will the US taxpayer have to throw at General Motors before it finally goes bankrupt?". Since the ’70s we have become accustomed to the concept of obsolescence, so we have a fair idea whether to fix our toaster or to replace it. But we have no idea what to do with the Federal Reserve banking system and fiat currency. Denial causes us to believe we can fix something that is broken beyond redemption.

It’s easier to cope with decisions about a toaster - the greatest hurdle to overcome is breakfast tomorrow morning. When the world’s reserve currency is at stake, we get sentimental. We easily believe that we cannot allow it to fail, that it is too big or too important. The sky will fall if we fail. The burden must be shared - a patch here, some string from me, an elastic band from you and we’ll have the old banger working again. Good old Dunkirk spirit!

As for the BRIC countries, will the hypnotic appeal of an invitation into the VIP lounges of the ‘rich countries club’ be sufficient allure for them to participate, or has the paradigm shifted? The new paradigm is barely a faint pencil sketch, but it is unlikely that it will resemble the one that prevailed for a decade or so, when the market economy failed the development needs of lower profile communities, or in other words, those who were unlucky enough to be born neither white nor Anglo-Saxon.

Today it will take an overwhelmingly strong argument in favour of using even more of the world’s savings to fix the self-inflicted demise of the USA economic powerhouse. So where does the moral responsibility really lie? We suggest that paradigm has indeed changed. The new basis of calculation will not be in dollars - which can and will be printed anyway. Like the battleground nurse in a makeshift hospital, the future saviours will need to quickly discern the cost of attending to one patient when measured against the lives of those neglected.

By this reasoning, the global cause is best served through a coordinated effort on the part of the G20 countries to build new and enduring economic micro-climates that will diversify our dependence on the G7, and so keep the the global economic flywheel turning - irrespective of the fortunes of the US consumer.