As the leaders of the world's most powerful countries headed home after a dispiriting summit, the world was fraught with economic peril. The biggest economy was flat on its back, struggling with the enduring aftershocks of a stock-market crash and serial bank failures. Trade relations between the larger economies were tetchy as arguments ricocheted across continents about who was a currency manipulator and who wasn't.
The international monetary order seemed at risk as a chastened U.S. President elected not long ago as a fresh, hopeful face returned home. No, not November 2010, but June 1933; not Barack Obama but Franklin Roosevelt. And the economic summit that ended "in complete and utter failure," as one historian put it, was held in London, during the Great Depression.
That international economic cooperation is almost always better than the alternative was as true in 1933 amid a far greater economic crisis than the one the world confronts today as it is today. (More on the parallels later.) There can be no sugarcoating the outcome of the recent G-20 meeting in Seoul: it was a bust. From Washington's perspective, the most startling failure was the inability to reach a deal with South Korea on a free-trade pact that's been pending for three years. Obama had teed it up as a way to create jobs for the U.S. (which it is), and months ago instructed his negotiators to make sure a deal got done so that he and South Korean President Lee Myung Bak could get credit for it in Seoul during the G-20. That this didn't happen was a breathtaking failure.
It wasn't the only one, though. The U.S. and its largest trading partners China and the E.U. in particular remain far apart on how to resolve massive international trade imbalances. The biggest hurdle: the U.S. Federal Reserve's launch of another round of so-called quantitative easing, which will further relax monetary policy in the U.S. in the hope of juicing growth and job creation, but which has annoyed pretty much everyone else. Countries such as Germany and Japan believe the dollar will now weaken further, thus hurting their exports. Emerging economies most prominently China believe that the creation of additional dollars by the Fed will increase hot money, seeking better returns than those available in a low-interest-rate environment in the U.S. That in turn could fuel asset bubbles like China's real estate market and exacerbate a growing inflation problem that is now Beijing's biggest economic concern.
In Seoul, Obama essentially had two responses to these complaints. First, the Fed is an independent institution, so don't yell at me. Second, I happen to think what the Fed is doing is not only right for us, but also right for the world. Yes, one of the Fed's two overarching mandates is to control inflation (the other is to boost employment). But Fed chief Ben Bernanke is more concerned about the U.S. tipping into deflation just as Japan did following its own balance-sheet bust in the mid-1990s. As former Fed governor Alan Blinder sarcastically put it in the Wall Street Journal recently, "We don't want to be the next Japan now, do we?"
As depressing as the lack of international coordination in Seoul may have been, it was not unprecedented, and it might not prove decisive. Here, the 1933 summit is instructive. "Domestic political constraints were ultimately responsible for the conference's failure," historian Barry Eichengreen wrote, "yet it was not an unmitigated economic disaster." Behind the shelter of a floating pound, Britain was "free to pursue cheap money policies designed to stimulate domestic economic activity." (Sound familiar?) Similarly, "dollar devaluation allowed the United States to pursue policies designed to stabilize her economy, although it was not until 1934 that those policies found reflection in the financial markets, and U.S. economic recovery finally got under way."
Nor is it just U.S. intentions that matter. In a recent, rare interview with Chinese magazine Caixin, Liu He, a key author of China's next five-year economic plan, described at length the economic transformation China now intends to make. This was the spend-over-save sound bite that should make hearts leap at the U.S. Treasury Department: "People's lives will not improve, social development will not proceed, and the entire transformation of the economic-development model cannot be implemented unless consumption expands." Tim Geithner couldn't have put it better himself. If the U.S. can reflate and get its unemployment rate headed down, while China moves over the next few years toward more consumption-driven growth, the G-20's sins of omission in Seoul will be long forgotten.