Tyndall Monthly Commentary

On 25 March 2009, in response to the crisis that was at that time engulfing the global economy, the G20 Heads of State met in the rather less-than-inspiring surroundings of the Excel Centre in London's Docklands.

Perhaps reflecting the austere times, there was no Louvre Palace or Plaza Hotel as a choice of venue; instead, the politicians were forced to use the London Boat Show's just-vacated venue, but nevertheless the assorted leaders managed to agree a coordinated fiscal stimulus for the global economy that many believed would solve its problems.

Indeed, even two years later, the conference host, Gordon Brown, was still claiming to have saved the world to an audience of economists, although it must be said that few in the room agreed with him by then...

It is true that Brown and his counterparts did provide a boost of sorts to the global economy from mid-2009 onwards through their use of huge largely bank-financed fiscal stimuli. When the Global Financial Crisis hit, the household sectors of many Western countries were profoundly cashflow negative (that is, they were dependent on borrowing money simply to cover the gap between their incomes and expenditure levels - a theme that New Zealand's households had taken to an extreme) but when their access to credit was impaired, they were no longer able to spend more than they earned after tax - hence expenditure levels (and profits) dropped sharply.  In 2009 and early 2010, though, the expansion of government borrowing that allowed the various public sectors to finance substantial net cash injections to their troubled households did much to bridge the gap between incomes and intended expenditure levels and therefore these policies soon gave rise to a rebound in expenditure, since households were able to top up their income receipts with new inflows from the governments.