Skip to main content
The Globe and Mail
Support Quality Journalism.
The Globe and Mail
First Access to Latest
Investment News
Collection of curated
e-books and guides
Inform your decisions via
Globe Investor Tools
per week
for first 24 weeks

Enjoy unlimited digital access
Enjoy Unlimited Digital Access
Get full access to
Just $1.99 per week for the first 24 weeks
Just $1.99 per week for the first 24 weeks
var select={root:".js-sub-pencil",control:".js-sub-pencil-control",open:"o-sub-pencil--open",closed:"o-sub-pencil--closed"},dom={},allowExpand=!0;function pencilInit(o){var e=arguments.length>1&&void 0!==arguments[1]&&arguments[1];select.root=o,dom.root=document.querySelector(select.root),dom.root&&(dom.control=document.querySelector(select.control),dom.control.addEventListener("click",onToggleClicked),setPanelState(e),window.addEventListener("scroll",onWindowScroll),dom.root.removeAttribute("hidden"))}function isPanelOpen(){return dom.root.classList.contains(}function setPanelState(o){dom.root.classList[o?"add":"remove"](,dom.root.classList[o?"remove":"add"](select.closed),dom.control.setAttribute("aria-expanded",o)}function onToggleClicked(){var l=!isPanelOpen();setPanelState(l)}function onWindowScroll(){window.requestAnimationFrame(function() {var l=isPanelOpen(),n=0===(document.body.scrollTop||document.documentElement.scrollTop);n||l||!allowExpand?n&&l&&(allowExpand=!0,setPanelState(!1)):(allowExpand=!1,setPanelState(!0))});}pencilInit(".js-sub-pencil",!1); // via darwin-bg var slideIndex = 0; carousel(); function carousel() { var i; var x = document.getElementsByClassName("subs_valueprop"); for (i = 0; i < x.length; i++) { x[i].style.display = "none"; } slideIndex++; if (slideIndex> x.length) { slideIndex = 1; } x[slideIndex - 1].style.display = "block"; setTimeout(carousel, 2500); } //

Somewhere between being seriously concerned and very nervous seems about the right attitude to have toward the international economy as Toronto fortifies itself, literally, for the G20 summit.

The international economy is beset by at least three imbalances. First, growth is much faster in developing countries than in developed ones, where unemployment is stubbornly high and overall output weak.

Second, some of this imbalance in growth is caused by China manipulating its currency, piling up huge surpluses on trade and current accounts with slower-growing Europe and the United States. This obdurate Chinese attitude will be on display in Toronto.

Story continues below advertisement

Third, debt levels are astronomical in most European countries and the United States, with very grave doubts about the ability of those countries to reduce them appreciably, even over what is euphemistically called the "medium" term, which can mean a very long time.

Recovery is especially fragile in Europe, and it remains a work in progress in the U.S., with states cutting spending, housing foreclosures everywhere, unemployment very high and a political system that inspires absolutely no confidence whatsoever that it can come to grips with the country's fiscal mess.

The U.S., being the world's leading economy, is still being rewarded for its bad behaviour. Investors, believing the U.S. still to be the world's safest haven, keep pushing up the dollar and investing in markets, when by rights the dollar should be crashing and markets plunging.

This circumstance means the American public remains too complacent about the true state of the country's parlous finances, which in turn allows lawmakers to jawbone, point fingers but do nothing. When yesterday, in a letter to other G20 leaders, President Barack Obama wrote that his country would "reduce our fiscal deficit to 3 per cent of GDP by fiscal year 2015" (from 11 per cent today), he was, as Americans say, whistling Dixie.

It would not take much to make the U.S. fiscal situation considerably worse, including another growth slowdown. Or, as Harvard professor Kenneth Rogoff predicted in a speech a week ago in Ottawa, the U.S. national government might have to bail out the country's largest state, California, which is headed to insolvency.

Prof. Rogoff and his academic partner Carmen Reinhart have published a book, This Time is Different: Eight Centuries of Financial Folly, that makes what the developed world is experiencing utterly consistent with past experience.

Having examined financial, banking and currency crises since the 1300s, they conclude that following a financial crisis comes a solvency crisis. The "debt explosion" they describe (and we are now experiencing) comes less from the cost of bailing out and recapitalizing the banking system, but from the collapse of government revenues, automatic increases in government spending from such policies as unemployment insurance, and stimulus measures of the kind every country introduced in the recession.

Story continues below advertisement

They calibrated the historical average of increased debt to be 86 per cent. It takes many years to climb down from the debt mountain; that is, to get a country's debt-to-GDP ratio back to where it was before a financial meltdown followed by the debt buildup.

In the U.S, it is estimated that the country will amass another $9-trillion of debt in the next decade, unless radical changes are made to spending and taxation of the kind that are hard to imagine Americans understanding their country requires. In Canada, a more fiscally prudent place, the last Harper budget estimated deficits of $158-billion from 2009-2010 to 2014-2015.

In Europe, the fiscal situation continent-wide is dire, with Greece already having hit the debt wall, and Portugal not far away. Spain is in terrible shape, too. There is every chance in the next 18 months, or less, that some small European countries will leave the euro because the fiscal pain of staying in the currency zone will be too great. This Tuesday, the new British government will announce how it plans to reduce that country's staggering deficit, amounting to about 11 per cent of GDP.

Many are the reasons for the U.S. chronic trade and current account deficits, but one is the Chinese neo-mercantilist attitude. The Chinese essentially want to play by half the international rules. They were accepted into the World Trade Organization, pledging liberalized trade. They take every opportunity to oppose protectionism - elsewhere.

Then, they refuse to allow their currency to float, as other countries do, with the result that the yuan remains artificially low in order to stimulate Chinese exports and maintain an enormous trade surplus.

No wonder U.S. legislators are growing increasingly angry. In his letter to G20 leaders, Mr. Obama, obviously referring to the Chinese, said, "I want to underscore that market-determined exchange rates are essential to global economic vitality."

Story continues below advertisement

The Chinese, however, do not apparently believe in "market-determined" exchange rates, but rather in government-manipulated ones. If the Chinese manipulate their currency, do not be surprised if Americans begin to manipulate their tariffs, since it would appear the Chinese are deaf to exhortations.

The Toronto summit, like the world economy itself, will be a place of hopeful sounds masking serious tensions and extreme nervousness.

Your Globe

Build your personal news feed

  1. Follow topics and authors relevant to your reading interests.
  2. Check your Following feed daily, and never miss an article. Access your Following feed from your account menu at the top right corner of every page.

Follow topics related to this article:

View more suggestions in Following Read more about following topics and authors
Report an error Editorial code of conduct
Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to If you want to write a letter to the editor, please forward to

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

If you do not see your comment posted immediately, it is being reviewed by the moderation team and may appear shortly, generally within an hour.

We aim to have all comments reviewed in a timely manner.

Comments that violate our community guidelines will not be posted.

Read our community guidelines here

Discussion loading ...

To view this site properly, enable cookies in your browser. Read our privacy policy to learn more.
How to enable cookies