The G8 in a global mess: 1920s and 1980s lessons

About the author
Ann Pettifor is a Director of PRIME Policy Research in Macroeconomics, whose work and writing has concentrated on the international financial architecture, the sovereign debts of the poorest countries, and the rise in sovereign, corporate and private debt in OECD economies.

Japan hosts the G8 summit in the northern island of Hokkaido on 7-9 July 2008 at a time when its prolonged period of deflation and economic failure have rendered its politicians impotent. Philip Stephens notes that - despite Japan's still considerable role in the global economy - the country's politicians are the weaklings of global geopolitics. "Where is Japan?", he asks. "The question is one of psychology rather than geography. Japan is still the world's second most powerful economy. Politically, it is all but invisible" (see "Japan goes missing: invisible host at the summit", Financial Times, 4 July 2008).


Ann Pettifor
is executive director of Advocacy International. In the 1990s she helped design and lead the international campaign Jubilee 2000. She is editor of The Real World Economic Outlook (Palgrave 2003)
and author of
The Coming First World Debt Crisis
(Palgrave, 2006). She blogs at debtonation.org
Also by Ann Pettifor on openDemocracy:

"The coming first world debt crisis" (1 September 2003)

"Ethiopia: the price of indifference" (19 February 2004)

"Gleneagles, 7/7 and Africa" (4 July 2006)

"Debtonation: how globalisation dies" (15 August 2007)

"Globalisation: sleepwalking to disaster" (11 December 2007

It was not always thus. Until as recently as 1990, Japan was booming. The earlier financial deregulation and low interest policies of the Bank of Japan had encouraged those Japanese who owned assets (such as property) to borrow against these assets. The ensuing excessive lending and borrowing fuelled a property bubble, which further enriched the wealthy. In 1987 alone, house prices rose in Tokyo by 67%. During the bubble years, "easy money" financed purchases of assets like stocks and shares, race horses, jewellery, art, New York's Rockefeller Center and Hollywood's Columbia Pictures (see the excellent book by Graham Turner, The Credit Crunch: Housing Bubbles, Globalisation and the Worldwide Economic Crisis (Pluto Press / University of Michigan Press, 2008).

The governors of the Bank of Japan were and are supposed to share with central bankers worldwide an obsession with inflation. Yet they stood by and allowed asset-price inflation to rip. Soon it became a massive bubble, and Japanese politicians - especially Yasuhiro Nakasone, prime minister from 1982-87 (and buddy of Ronald Reagan) - were able to adopt a more confident pose upon the world stage.

As with all bubbles, bursting was inevitable - and in this case, as so often, painful. The property boom began to implode in 1989, and at that point the hard men of the Bank of Japan set out to prove their virility by concentrating on a different threat: wage inflation. The fear that wage inflation would lead to flaccid economic growth led them in May 1990 to inject their economy with the "viagra" of higher interest rates. But even after the stock market had crashed violently by the end of 1990, not only did interest rates stay up, but the bank pushed them up a fifth time to 6%.

Remarkably, rates stayed high throughout the ensuing turmoil, as non-performing loans piled up on the balance-sheets of banks; homeowners watched house prices fall; companies failed; and the "salarymen" of Japan began to lose their jobs. The social consequences were enormous: families suffered, marriages broke down, and many treated their pain with alcohol and drugs. Japanese politicians returned to their more familiar pose of caution and discretion, and were now near-invisible at global gatherings.

The bubble was brief and the reckoning long. But what is relevant in the global context is that the Bank of Japan's macho behaviour in exacerbating the nation's crisis was far from unique.

An American echo

A long way back, by early 1929, the governors of the United States Federal Reserve had begun to worry that their earlier limp regulation of the banks and of credit had fuelled the dysfunctional stock-market bubble. They had been happy to watch the rich growing very much richer on the back of lax lending, but were now concerned that those with jobs might demand higher wages - a threat they called "inflation". They resolved to address this threat with higher interest rates. On 9 August 1929, they raised interest rates from 5% to 6%.


Also in openDemocracy on the G8 and the global economy:

Ehsan Masood, "The aid business: phantoms and realities" (18 July 2006)

Michael Hopkins, "Sustainable development: from word to policy" (11 April 2007)

Stephen Browne, "G8 aid: beyond the target trap" (6 June 2007)

Paul Collier, "The aid evasion: raising the ‘bottom billion'" (11 June 2007)

Kweku Ampiah, "Japan and Africa: a distant partnership" (6 June 2008)

Simon Maxwell, "Development in a downturn" (4 July 2008)


Interest rates, as they were to do in Japan in 1990, stayed high throughout the crisis - in this case, the chaos and widespread panic of the 1929 stock-market crash. Because prices were falling, real rates of interest were much higher than the nominal rate of 6%, thus inflicting severe pain on stock-market borrowers. Nevertheless the hard men of the Federal Reserve kept rates up, forcing debtors into default, companies into bankruptcy, and people out of their jobs and homes. Their actions are widely acknowledged to have been responsible for the prolonged economic failure that became the "great depression".

By coincidence it was on the same day seventy-eight years later - 9 August 2007 - that the global economy "debtonated" (see "Debtonation: how globalisation dies", 15 August 2007). The Bank for International Settlements (the mother of all central banks) has confirmed in its (seventy-eighth) annual report that on that day "turmoil in financial markets came to the boil...and central banks felt compelled to take extraordinary measures to restore order in the interbank market" (see the introduction to the Bank for International Settlements report, 30 June 2008).

It was central bankers - those "guardians of the nation's finances" - that had been responsible for the turmoil in the first place. Again, central bankers - like the governors of the Federal Reserve in the 1920s and the Bank of Japan in the 1980s - had been persuaded by the ideologues of neo-liberal economics that if they repressed wages and prices, and simultaneously deregulated the finance sector, perpetual economic growth would be guaranteed, hedge funds would prosper, and the rich would be a whole lot happier. And so it proved - until, that is, 9 August 2007.

Today, decision-makers in the United States, Britain and Euroland are confronted by the same threats which faced their predecessors in America in 1929 and Japan in 1990. Although unemployment is starting to rise sharply in some countries - notably Spain - the European Central Bank (ECB) worries that wages might rise. So, on 3 July, the ECB applied a dose of interest-rate "viagra" to the weakening Euroland economy by raising interest-rates to 4.25%.

As Angela Merkel, Nicolas Sarkozy, and Gordon Brown stand alongside Yasuo Fukuda and other colleagues in Hokkaido, they might usefully ponder the impotence of Japanese politicians - and begin to look for better ways to repair the systemic dysfunction of an unsustainable global economy.