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French Version

A G8 removed from the real world

It’s been 13 long months since the leaders of the G8 gathered for their annual talkfest. I’m sure the details of last year’s communiqué are etched into your brain but just in case you’ve forgotten what was agreed in Heiligendamm, here’s a reminder. “We noted,” the G8 said, “that the world economy is in good condition and growth is more evenly distributed across regions.” This was June 8 2007, two months to the day before the entire global financial system came to a shuddering halt. If you like your humor black, it’s rather funny isn’t it?

But wait, because it gets better. The communiqué expressed confidence that there would be “a smooth adjustment of global imbalances which should take place in the context of sustained and robust economic growth”. Glad to see, then, that there was no risk that the US sub-prime mortgage crisis would prompt what the International Monetary Fund has called the biggest shock to the global financial system since the Great Depression.

In fact, the G8 had nothing to say about housing bubbles at all, though it did find time to discuss the need for a settlement between Armenia and Azerbaijan over Nagorno-Karabakh. And so it goes on. The G8 managed a cursory glance at what hedge funds were up to and decided that—on balance—there was nothing really to worry about. “While noting the positive contribution [sic] of hedge funds to financial-market stability, we also want to minimize systemic risks by increasing transparency and market discipline on the part of all parties involved.”

These are the same cuddly hedge funds, presumably, that have been in large part responsible for driving up the price of oil and food on commodity markets, to the point where the “good condition” of the global economy is threatened by stagflation and hunger?

As one hedge fund manager, Michael Masters, told a Congressional hearing in May, speculation in commodity futures has increased 20 times in the past five years—from $13 billion to $260 billion—and during that time the price of a basket of commodities has risen by 183 percent. The increase in demand from speculators, Masters said, had been almost equal to the increase in demand from China.

There are extremely eminent economists, such as Paul Krugman, who say that speculation is not the reason the cost of crude has doubled in the past year even though physical demand has barely increased. There is, of course, one way to find out. The G8 could agree this week to release crude from their strategic reserves for the hedge funds to buy. My bet is that if they did so, the price of oil would fall like a stone.

Will the G8 do so? It would be foolish to bank on it, and indeed far safer to expect a repeat of last year’s hotch-potch of complacent inanity. To be sure, there will be reference to the headwinds facing the global economy because the challenges facing the summit are as great as they have been since French president Valéry Giscard D’Estaing called for the first cozy chat at the chateau of Rambouillet outside Paris in 1975. Indeed, the threat is now even greater, since at least in the mid-1970s the problems facing the summiteers were primarily economic—the collapse of the post-war golden age of growth in the face of rising inflation. This time, the G8 has more on its plate than simply a bog-standard cyclical economic downturn at the end of a prolonged period of low inflation and strong growth. In addition there are three other meaty issues to consider: the threat of climate change; the threat that the global economy may soon be facing shortages of two vital resources (oil and water), and the parlous position of many of the world’s poorest countries as they grapple with the effects of global warming and rising food prices. As a paper released by the Cabinet Office today shows, it is the poor who suffer most when the cost of food rises: In Britain food accounts for 15 percent of the household budgets of the poorest 10 percent of the population compared with 7 percent for the richest 10 percent. In the developing world, food can take 50-80 percent of a family’s income.


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