Out of Gas

In a memorable episode of the sci-fi series Firefly entitled “Out of Gas”, Captain Mal Reynolds is forced to take extreme measures to save his spacecraft. Alone on the ship, after being shot and almost killed by an interplanetary freebooter, Mal stays awake long enough to inject a massive dose of adrenaline directly into his own heart.

This allows him to revive to the point where he can make necessary repairs to keep his ship alive. Well aware that the adrenaline permits only a temporary reprieve, Mal knows that when his job is done, inevitable collapse and death will result that much more quickly.

Mal’s desperate stratagem was on my mind today when I read reports about the results of the G20 summit in London. With the help of the IMF, the major developed nations decided to shoot a big dose of fiscal adrenaline into the heart of the world economy. This will allow it to drag itself back to its feet and stagger around for a year or two, accomplishing amazing feats of endurance and fortitude. But the final result is inevitable: collapse and death, and coming much sooner than it would have if it weren’t for all that adrenaline.

Make no mistake about it: the actions of the G20 countries via the IMF are inflationary in the extreme. In a move to disguise the coming inflation, the IMF announced plans to sell 403 tons of gold. This serves to drive down the price of gold, both by the sale itself and by talking about it in advance. Since the price of gold serves as an advance warning of inflation, the IMF is attempting to mask the shape of things to come by keeping the price artificially low for a bit longer.

To extend the medical metaphor: it’s like the patient who has been dosed with Tylenol to bring down a fever. He doesn’t know how sick he is until the Tylenol wears off, and then he passes out in the middle of Wal-Mart and the EMTs have to haul him away on a gurney.

Except that there are no EMTs qualified to do emergency treatment on what is about to happen to the world economy.

Here’s the result of the G20, as reported by Bloomberg:

The International Monetary Fund, dismissed as increasingly irrelevant when the world economy was booming, will now wield more than $1 trillion to help bring it back to life.

Leaders from the world’s most powerful nations, meeting in London yesterday, agreed to triple the money the IMF can lend to rescue crisis-stricken nations, to $750 billion. The agency will also get another $250 billion in Special Drawing Rights, an overdraft facility for its 185 members.

The Group of 20 is turning to the Washington-based agency to prevent the worst financial crisis since the Great Depression from swamping more developing nations.

[…]

The World Bank and other lenders to poor nations will receive another $100 billion, and a further $250 billion will be devoted to trade finance, the G-20 decided. The IMF and the World Bank were founded in 1944 to help rebuild the global economy after World War II.

“This is the biggest increase in resources in the history of our international institutions,” said U.K. Prime Minister Gordon Brown, who presided over the talks in London that led to the agreement.

Notice the formula that the politicians are following to achieve the resuscitation of the economy — they are going to interfere even more with the internal workings of business enterprises:
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G-20 leaders also called for stricter limits on hedge funds, executive pay, credit-rating firms and risk-taking by banks as part of what their statement called a “global plan for recovery on an unprecedented scale.” The leaders avoided the divisive question of whether to deliver more fiscal stimulus to their own economies.

An interesting detail is that the capital infusion is not coming from the USA, at least in the short term:

Japan, the European Union and China agreed to provide the first $250 billion of the increase in IMF rescue funds, and Strauss-Khan said work would begin to secure the remaining $250 from other countries.

No new reserve currency is mandated, but in effect the IMF will be the new creator of fiat money with its increased “Special Drawing Rights”:

The $250 billion increase in Special Drawing Rights will allow countries to tap IMF money without having to accept changes to economic policies often demanded as a condition of loans. The money is disbursed in proportion to the money each member-nation pays into the fund. Rich nations will be allowed to divert their allocations to countries in greater need.

The larger pool of SDRs will enable nations to boost their foreign-exchange reserves, augmenting global liquidity and helping defend against speculative attacks.

And now that the IMF is liquid again, who’s first in line for a bailout?

Yesterday’s measures are the latest evidence of the IMF’s growing role. Mexico this week said it would seek a $48 billion line of credit from the IMF.

I’m not sure I’d want to extend any credit to Mexico now in the absence of any serious collateral.

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When Mal Reynolds fixed his ship’s engine and then passed out on the deck, he was rescued by the unexpected return of his crew. When he woke up later in the sick bay, he was in good hands, and destined to make a complete recovery.

But — unless the aliens arrive to save us from ourselves — there’s no one coming to rescue Gordon Brown, Barack Obama, Nicolas Sarkozy, Angela Merkel, and all the other luminaries who so heedlessly sell their countries’ birthright for a mess of fiscal pottage.

This is a global crisis, and the people in power are now making mistakes of such magnitude that they may impoverish their descendants unto the third and fourth generations. And there’s no Interstellar Monetary Fund based in Alpha Centauri that can extend our planet a line of credit to see it through this mess.

This is it.

It doesn’t make any sense that the people who hold power are taking such feckless and irresponsible action. Not all of them are stupid — especially the bankers and financial wizards who have the ear of the leaders themselves — and even the most cynical of them knows that the chickens will come home to roost very soon, well within their own lifetimes. When that happens, escape to Baffin Land under an assumed name will not suffice to save them.

So why do it this way?

It’s hubris of the highest order.