The Global Public Spending Initiative

Table of Contents

The hour of global policy has arrived right now .............................................................. 2

1. Monetary policy has reached an impasse and is not effective enough any more
against this crisis................................................................................................... 2
2. Fiscal policy (i.e. Public Spending) is now ineludible ......................................... 3
3. But nowadays, any Public Spending Policy has to go Global.............................. 3
4. But if it has to go Global, then political leaders might need to live up to resolve a
multilateral prisoner’s dilemma............................................................................ 4
5. And, still, the situation urges a global political agreement .................................. 4
6. Thus, current situation requires an immediate arrange for a effective political
summit devoted to Global Public Spending ......................................................... 5
7. Any potential reform of financial system is also an inexcusable point, but it may,
or may not, be part of a summit devoted to the main point: Global Public
Spending Policy.................................................................................................... 6
8. The appointed G-20 summit in November is not enough nor the sole big priority
any more, a Global Public Spending Summit has precedence, and some relevant
political leader(s) has(have) to say it so ............................................................... 6
9. An extra consideration: pre-existing formats and byzantine theoretical-
ideological economic debates are luxuries we cannot allow for right now.......... 9
10. And finally: if you happen to think (once again?) that the worst is behind, please
think it twice ....................................................................................................... 10

Copyrights
© Luis Castro Pérez & Moisés Martín González, 2008. All Rights Reserved.
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Disclaimer
Both authors explicitly does not endorse nor criticize nor have any direct link or direct
collaboration nor are conditioned in any way towards or against any political or
economical position whatsoever maintained by any national government, political
leader(s) or representative(s), political party(ies) or private productive or financial
group(s), and specifically none from our country of origin. The analysis and opinions in
this text are the sole individual private responsibility of both authors. His sole objective
is to make known his opinions and, if they are found useful, try to reach those who
could consider them and apply them for the benefit of all.

Contact info:
gps.initiative@gmail.com
GPS Initiative - 2/11

The hour of global policy has arrived right now

At the present moment, the financial and economic crisis has reached a point in which it
has turned into a strictly political problem, and one of a multilateral nature.

As a European initiative and hosted by United States, a political summit of G-20

countries has been arranged to be held in Washington next November 15th. The stated
objectives of that summit are:
- to review progress being made to address the current financial crisis
- to advance a common understanding of its causes, and
- to agree on a common set of principles for reform of the regulatory and
institutional regimes for the world’s financial sectors

Those objectives have yet been overtaken by the economic developments.

Along with this one and as soon as possible, a new, different and comprehensive
summit needs to be summoned that have a real global scope, in order to reach an
agreement on a Global Coordinated Public Spending Policy.

The current crisis has reached a stage in which any possible way to a practical solution
seems to go through summoning and working out a summit like that, and now it is a
strictly political question.

Not to undertake that Global Public Spending action would mean to accept a terrible
and long lasting global recession, when no one can dare to rule out with enough
certainty the possibility of it lasting more or even much more than expected, and with
all its probable as well as possible collateral and subsequent consequences. No one
should choose to leave it unfixed and see what it happens, because if you wait to see
what it happens, probably then it will be too late, too difficult to correct it.

Thus, not taking action now is not an option.

Let us review in detail the essential points of the situation as it presents itself at this very
moment and why are we saying this.

1. Monetary policy has reached an impasse and is not effective

enough any more against this crisis

Monetary measures had to be tried, and indeed have been tried -and still is- with a
remarkable level of energy, creativity and agility. Not a single critic intended.

Unfortunately, the best efforts in this direction have not got the crisis solved, but instead
the whole situation has evolved towards stagnation under the form of a huge liquidity
trap. LIBOR rates are misleading. The bitter fact is, despite those measures and a huge
capital injection, that bank lending is not resuming at anything resembling normal
levels at all.

Monetary policy can be boosted to its limit, and this can render two possible results: (a)
failure in reinflating prices thus making the grandmother of all liquidity traps, or (b)
 GPS Initiative - 3/11

success in reinflating prices but with a too high a risk of rendering the whole situation
as a global stanflation (stagnation + inflation) which would dwarf that in the 70s.

Thus, now it is the right time to consider boosting that other tool, fiscal policy.

2. Fiscal policy (i.e. Public Spending) is now ineludible

Fiscal rebates are less effective than public spending.

Fiscal rebates so far have proved to be insufficient as they have been caught also in a
liquidity trap.

This liquidity trap is compounded of high levels of indebtedness and also because a
growing deflationary expectative.

Public spending is the tool of choice now, and that poses the whole problem as a strictly
political decision. It does not depend on citizens, corporations, nor on private or central
banks.

3. But nowadays, any Public Spending Policy has to go Global

Before globalization, a given country still could achieve unilateral success resorting to a
public spending fiscal policy.

But nowadays that is not so easy any more: whatever public effort, whenever it is
started unilaterally because of not being aware of this fact, would tend to dissipate its
potential benefits for the country who undertake it because of globalization. This would
potentially (and probably) confer a share of the beneficial effect to other country(-ies)
even if they are not undertaking that kind of effort.

Even if undertaking it knowingly of this fact but disregarding it out of sheer generosity,
we should point that (a) it still would not be fair (b) we suspect that it would create
unsuspected unbalances when we are well served of them and there is a need to start
reducing them, and the most important (c) it would be a sub-optimal tactic in a moment
when every country and economic region in the world needs to optimize their economic
efforts more than ever.

Thus, unilateral Public Spending tactic policies, whether from a single country -being it
big or small, or from one or two big economic region(s), are sub-optimal and even a
potentially risky strategy.

Globalization conveys that financial and economic crises become global more easily
than ever.

Globalization also conveys that, more than ever, solutions –and specifically Public
Spending policies- have to go ineludibly Global.
GPS Initiative - 4/11

4. But if it has to go Global, then political leaders might need to

live up to resolve a multilateral prisoner’s dilemma

Confronted with the need for a global public spending policy, political leaders will have
to live up to cope and solve to mutual common benefit a “multilateral prisoner’s
dilemma”. That is their challenge. No more, no less. And they can success.

In prisoner’s dilemma, essentially, a situation is set in which: if both parts cooperate,

both parts achieve gains. But there is the option of one of them defecting from the other
part (betraying the needed agreement), thus achieving some advantage for oneself at the
expense of the other.

In the present circumstances, all of us are prisoners of a crisis that is global in nature.

And at this moment each country (and its political leader) potentially may find
themselves as a prisoner of one or more among a series of unilateral interest factors, one
or more among:
- Idiosyncrasies in his home country economy (i.e. level of national debt and others)
- Non economic political factors (i.e. geopolitics)
- Uncertainty about interests and intentions of the rest
- Individual factors, internal political factors, neighbourhood factors…
- and a more or less extended etcetera

But at the same time each and every one of them are and should be fully aware that the
common enemy, i.e. global economic downside risks, is not going to let his/her country
unaffected, but leaving the situation unchecked should strike badly their countries and it
also should strike badly the other countries, so there is a need to all political leaders
contributing to a common, conjoint action.

At the present moment, political leaders and they only as public representatives bear the
responsibility of sorting out any potential multilateral prisoner’s dilemma in such a way
that:
- some renounce about some unilateral active or advantage might to be accepted
- global benefit is maximized and global injuries because of the crisis are limited
for every one

You would better sort it out, and soon, or instead…

- assume the responsibility for a potential world bankruptcy, a long lasting
recession and a global failure

5. And, still, the situation urges a global political agreement

Current global financial and economical crisis has a very dynamic destructive nature.

It runs fast and furious. So far it has impacted fully with the US as epicentre, through
financial asset backed securities and derivatives, then in Japan as epicentre through
unwinding of Japanese yen carry-trade. Now there is an increasingly risk of it being just
a question of time before it strikes fully Western Europe as epicentre through some
emergent economy(ies) defaulting the loans its banks have lent, but this potential third
 GPS Initiative - 5/11

strike would come as the world economy, and that of Western Europe as well, are yet
weakened by the former two.

Even maritime trade is in an increasing risk of becoming to a halt, not only because of a
huge downturn in the global aggregate demand, but even the remaining deals with a
seller and a buyer willing to close the deal are being prevented to do so because of the
credit crunch.

Monetary policy and rescue measures have been fast, creative and agile, especially in
the US, also in Western Europe. But regretfully the crisis dynamics has rendered it
stagnated, blocked in a huge liquidity trap. Banks are not resuming lending. Credit
crunch persists. Real economy is suffocated. Citizens’ spending is retracting.
Deleveraging/unwinding is at best completed halfway. In summary, the essential
mechanisms that gave rise to that fast and furious onset are still alive and could kick
again at any time. And with much the same strength and speed.

Global public spending fiscal policy, in contrast with that fast and furious pace of this
deleveraging, Big Unwinding crisis of our time, needs… Time:
- a multilateral politic negotiation process necessarily demands time
- once achieved such an agreement, to implement the measures and the necessary
supervision of its implementation necessarily demands time
- once implemented, the manifestation of the expected benefits necessarily
demands time

Thus, the earlier all of it is started, the better. All the responsible leaders need to be fully
awake to this situation, to the needed task, and start moving. Time is not a luxury world
population can count on.

6. Thus, current situation requires an immediate arrange for a

effective political summit devoted to Global Public Spending
As nowadays a public spending fiscal policy necessarily has to go global, a summit is
needed that goes the most global that is possible in practice.

If it is a G-50, that would be better than a G-40. If the leaders summoned represent a
90% of world GDP that would be better than if they represent a 70% of it.

This summit needs to be accorded. An agreement has to be advanced and reached. Not
to summon it and reach it is not an option. And it is urgent because crisis is fast. And
agreements and implementation are slow.
GPS Initiative - 6/11

7. Any potential reform of financial system is also an

inexcusable point, but it may, or may not, be part of a
summit devoted to the main point: Global Public Spending
Policy

A sound reform of the international financial system is also an inexcusable task.

Financial sector is the hearth of economy. And money and its use, despite being
depicted and something cold or “materialistic”, it is the material form of literally
millions of day to day efforts and dreams of millions of people around the world who
earn it with its daily hard work, for themselves, for their families, relatives and countries
of origin.

You just don’t leave your own heart unchecked, or leave it carelessly under any kind of
bad external or internal influence. You shouldn’t.

So you should regard the financial system, whether you are a politician, a finance
minister, an economist or just another conscious citizen. So you don’t want to leave the
financial system unchecked, while you want to define, find and pick the optimal point
where there is enough regulation to have a safe and healthy economic hearth but at the
same time not so much regulation as it could suffocate it.

Nobody says nor for a moment that this is an easy task. But it is ineludible. Not to
undertake it is not an option. There are countries and regions in the world which have
experience with bank crisis. Hear all their contributions. An optimal regulation point
should be and can be achieved.

But, being this task as important as it is, being the first priority until recently, now it is
not the first priority any more as the first priority is right now a Global Public Spending
policy, being the financial reform second only to this one. Events present itself at its
own pace, and we need to move in accordance with the events.

So the question remains open about if it is convenient to integrate this financial reform,
or not, within or besides a negotiation about a Global Public Spending policy. One
option or the other should be decided, the most convenient.

But a reform of the international financial system is not the first priority any more in
terms of urgency/importance.

The first priority in terms of urgency/importance is to start as soon as possible a process

aimed to reach an almost global agreement about a global public spending policy.

Because the dynamics of this crisis are fast. And the negotiation process needs time.

8. The appointed G-20 summit in November is not enough nor

the sole big priority any more, a Global Public Spending
Summit has precedence, and some relevant political
leader(s) has(have) to say it so
 GPS Initiative - 7/11

To achieve a widely multilateral agreement about public spending fiscal policy is a

priority of the maximum importance, urgency, and posing important objective and
subjective difficulties that requires a common effort and time to solve them.

While perhaps G-20-financial-reform format was a enough starting point given that the
world has some time, at this very moment to rely solely upon any summit format that
may have been valid before but is not sufficient now, and to devote precious time and
effort solely to it, is a luxury that world’s population cannot allow for.

It would be necessary that at least one political leader of some advanced economy, and
much better if they are more than one, state openly this new development in the state of
affairs.

In so doing, we would recover the initiative in this Financial World War. A very
unusual war that is not being fought against any country or alliance of countries, but this
time it is being fought against a common enemy of all countries but that has no human
shape. Each and every single country is challenged by this crisis.

So some one have to say that a global conjoint action is needed and indeed it has been
said yet.

But some one has also to say to the world the type of global conjoint action that is to be
set, and the dates, members and methodology that is going to be used in order to have
this plan starting to work as soon as possible. And that has to be a convincing plan.
Nothing less is valid than a convincing Global Public Spending agreement plan.

Some one could think about this being alarming. On the contrary, we are fully
convinced beyond any doubt that, at this very moment, this would be the sole and only
factor that could effectively put a huge stop this dangerous economic bleeding and
prevent even more potential economic and non economic problems.

We trust this strategy can make its way towards real action. Would it be difficult,
however, we think that an attitude of conformity with the group is not the right
response. Nobody should endorse an action that is deemed as insufficient. Some
political leaders in the past had to stood alone until events came to agree with their
vision. So be prepared to defend the vision you have if necessary. But again, we trust
fully that eventually a global strategy will make its way and be put in action. We would
only regret that more precious time is lost, and more losses come, before the need
become overwhelmingly clear.

When problems are small, you should think little. But when problems are Real Big, by
your soul, you’d better think Big. Cool, prudent, always, sure. But also brave enough to
think big and stick to that leading idea no matter what others might say, think or do.

So it has to be said. Say it.

Now, given that the instability in the international financial structure feeds essentially
on three broken –or about to be broken- pillars, that is:
- US financial securities (backed by mortgages and other types of loans)
- Japanese yen carry-trade
- Leveraged loans in emerging economies (75% lent by Western Europe banks)
GPS Initiative - 8/11

Then it would be very healthy, of justice and optimal that the political leaders
eventually announcing and leading a Global Public Spending agreement strategy were:
- Representative of the United States of America (given the political conjuncture
in the States right now, may be both Interim President Mr.George W.Bush and
just elected President Mr.Barack H.Obama)
- Representative of Japan (Mr.Taro Aso)
- Representatives of Western Europe (EU+UK) (Mr.Miguel Durao Barroso and
Mr.Gordon Brown)

We would like to underscore as a point of specific relevance the US leadership, and this
because of several reasons. Some people might agree or not with them, or would put
them otherwise, or have others. But ours are that the US:
- is the most important economy in the world and the most flexible one, or one of
the most flexible ones.
- is the biggest economic referent, or among the biggest economic referents
- huge public debt of the most important economy in the world is a major
obstacle, or may be regarded as a major obstacle to accept such a Global Public
Spending effort (and a convincing endorsement of the US would be very
welcomed)
- current crisis started there (we do not endorse the US are the sole responsible,
and for sure they are not; but, still, public perception links the US with the crisis)
- even those who don’t agree with the results must agree the recent electoral US
results have created expectations all around the world. Many people have now
fresh positive expectations about the US and this would be the kind of
constructive move that would meet those expectations.

And then, the agreement should specify clearly and convincingly:

- a given share of GDP (5%, 15%, 10%; fixed percent, or a flexible range;
whatever is better) to be spent by national governments in a given time span
- a surveillance and early alert institution or committee (¿IMF?) to check that (a)
every nation is sticking to the agreement, and also (b) to detect early deviations,
unbalances, unexpected developments and have them fixed in time.
- a sanction system to be sure that every government does not deviate too much
from the original plan.
- regular follow-up reports and one or more clear criterions to check that crisis is
really over, the plan has been a success and trade, markets and economies in
general can resume fully free normal rules of functioning (while maintaining the
reformed optimally balanced and safe new financial rules).

Now, this whole pack design could be improved, but something like this is what we
would call a convincing, powerful message to the financial, economic and whole world.

We would improve it in a very specific way: that of preventing this global crisis to
strike badly on the weakest of the weak, and even seizing the opportunity to start the
end of extreme poverty in the world. Note that we do not talk about “normal” poverty,
but about extreme poverty. Nowadays, this is absolutely feasible. The technology that
achieves it is not a leftist nor a rightist one (in fact, having being attacked by both sides,
that is a good clue that it may be the right answer). And even better, it is affordable even
in this severe downturn.

The technology exists; it was started in Bangla Desh in the midst of another ugly
recession, in the 70s. In those years, and also since then, it has been successfully stress
 GPS Initiative - 9/11

and cross-nationally and cross-culturally tested with outstanding continued results. That
technology does not even need a big chunk of public international resources. In fact,
they prefer to stand as apart as possible from public capital. All of these are proven,
hard facts.

Being so, it is not a matter about which we can feel legitimate pride of ourselves as
human beings that there still remains extreme poverty in the world in a time when there
is a proven and affordable (even in this time of crisis) technology that could get most of
those extremely poor people improving their condition by coming out from extreme
poverty. Maybe for others’ criterion they still would be poor. But for their own, they are
not, any more. Not materially nor subjectively, as they can fulfil their most basic needs
(food, basic housing, clothing and schooling), and –no less important- they make it by
their own effort.

So we could improve the whole pack adding specific plans to agree on measures that
allow for a universal or almost universal expansion of micro-credit programs that have
been successful so far, and to review other competing public international programs that
has not.

Now, the whole pack design could be improved, but something like this is what we
would call a convincing, powerful and also very conscientious message to the financial,
economic and whole world.

Finally: of course, the world is yet badly indebted. In some countries it is a real big
problem. And to undertake even more indebtedness is an understandable matter of
concern. In the past everybody has become too much indebted, not always because of
the right reasons and in the right way. But if there is no other way, then let us allocate a
conscious and manageable extra debt, this time for the right global reasons.

9. An extra consideration: pre-existing formats and byzantine

theoretical-ideological economic debates are luxuries we
cannot allow for right now

The fact that perhaps there is not a previous precedent for the required type of summit –
nor G-7, G-10, G-20, not even Bretton Woods or the United Nations are really
satisfactory referents- is a completely irrelevant point.

Even more irrelevant would be any byzantine discussion about liberalism versus
interventionism, Europeans versus Americans, leftist versus rightist, and the like.
Irrelevant as well as an even more unnecessary and useless luxury.

The evolution of the present crisis has lead to de facto throwing through the window a
good share of supposedly untouchable dogmata that under stress test have proven to be
completely dispensable, on the understanding that this are difficult times that call for
unusual temporal measures.

You can ponder how the US, paramount of economic liberalism, has nationalized de
facto a good chunk of their financial and productive system. The Federal Reserve has
slashed rates until close to zero. And rightly they did so. On his part, the ECB is de
facto going well beyond its theoretically only mandate to control inflation. And EU,
GPS Initiative - 10/11

once very hawkish against any public intervention on private deals and companies, has
allowed for a generalized public recapitalization of banks. And those were the proper
measures to take. Central bankers all around the world, each one with a mandate of
independency, cut rates co-ordinately. And well done it was.

But all those measures transcend any byzantine debate. And that is the right way.

Byzantines and Ottomans left us a nice lesson. You’d better don’t indulge yourself in
weird intellectual debates while there is something urgent and important to attend.

So everybody, please do not mess around with byzantine ideological discussions.

Free trade, free markets and free economies are an unquestionable achievement we
human beings should feel proud for and take care of. All of us are fully aware that free
economies almost always are way more efficient than state-intervened ones.

But in order to be proud and take care of free trade, free markets and free economies,
we have to be sure that we have trade, markets and economies, to start with. And in
order to do so, as in wartime you suspend temporarily habeas corpus and other civilian
rights, in financial wartime against a non-human common enemy, you may need to
reduce temporarily the normal free economy rules. The key points here are that (a) it has
to be ineludibly temporal measures and you have to be sure of that, and (b) this is a
relatively small sacrifice intended to prevent a far bigger damage and/or achieve a far
bigger benefit.

10. And finally: if you happen to think (once again?) that the
worst is behind, please think it twice
Even maritime trade is in an increasing risk to becoming to a halt under the double
wham of an awful drop in demand and –worse- a credit crunch affecting letters of
credit.

If there has been a single factor contributing to evolution of human societies in history,
that has been free trades. If there has been a single factor contributing to
involution/degradation of human societies in history, it has been that of barriers,
obstacles and isolation.

On theory, everybody is convinced that this time is different. Nobody will touch
international trade because of the lessons of the past.

But you should check the news about global maritime trade, and the problems with
letters of credit. And ponder the potential evolution of all this state of affairs in the
eventuality of stagnation longer than the consensus. Consider besides that so far
consensus prevision after consensus prevision has been beaten by the crisis. Have in
mind that only the most bearish previsions have succeeded so far, and the consensus has
had to catch up. But even those who have anticipated it better have been surprised by
the violent speed of events.

So the hope is that nobody will repeat tariffs mistakes and the like, because this time is
different. And the hope is that things cannot be worse and the worst is behind. But so
far, each time everybody thought that the worst was behind (and there have been too
many instances of that yet), then the facts have demonstrated easily otherwise.
 GPS Initiative - 11/11

After all that considerations, you can rethink if all of us can safely rule out, in the long
run, the potential economical and non economical consequences of not acting now.

Will we keep on sticking to hopes and deciding to wait and see if things sort out by
itself?

Please, everybody, do not distract yourself with irrelevant details and –please- pay due
attention to the need and the urgency to start and reach as soon as possible agreement on
an effective and realist Global Public Spending policy.

And to the political representatives: the present and the future of millions of people all
around the world is now in your hands. Please, be sure to make the right decisions and
look forward to a day when you can look back and remember what all of you achieved
through long and difficult negotiations.

Something like this has never been attempted before. But it is not the first instance in
which something has been achieved for the first time. And now there is a global need to
do it. Please, think Big, think cooperatively, think smart. You and your colleagues will
need to offer your best in order to free us all, you and your country included, from this
global threat.

And finally, if you think this whole picture and analysis we have composed makes
sense, then you’re conscious. Even if you don’t, you are also conscious.

And whoever is conscious, is responsible of acting in accordance to that knowledge, or

choosing instead not to act or to act differently. We have decided to act. Now it is your
turn, respectable reader. If you don’t agree, criticize it. But if you happen to agree, take
at least some minutes to think how this can reach the economic responsible leaders who
might put it into real action.

This is not a game. We can’t change channel. This is the real thing.

Go ahead.

Luis Castro (Economist) & Moisés Martín (Psychologist)

Madrid (Spain) - Sunday, Nov 9th 2.008