It is now widely recognised that the world economy is facing the danger of a prolonged recession, and even a depression. It is interesting to hear President Bush saying that he took action on financial bailout because he was advised that inaction may lead to an economic disaster which may be even worse than the Great Depression. The prospects are indeed frightening. The US household consumption which has been an engine of growth of the world economy in recent years is going in reverse, and in a big way. In the third quarter of 2008, consumer demand declined by 3.1%. In October 2008, sales of new houses were 40% lower than a year ago and sales of new vehicles plummeted by a staggering 31.9% over the previous year. The losses in wealth of US households through decline in equities and housing are estimated to be over $10 trillion. It is reported that more than 50% of the US households are close to bankruptcy. With unemployment, bankruptcies and foreclosures increasing, and sources of credit drying up, it would not unreasonable to assume that the US households will have to move away from their imprudent habits of negative savings and move towards saving rate of at least 10% of personal disposable income which they used to have before the financial bubble started in the eighties. That itself will create over time a hole in world final demand of about $1 trillion. With Europe and Japan going in recession and growth slowing down in the developing countries, consumption in the rest of the world may also decline. Nor could private investment be expected to be buoyant when stock markets are tanking, credit system is freezing and demands prospects are bleak. On ?business as usual? scenario, a reduction in global effective demand of about $ 2 trillion (or about 4% of global GDP) in 2009 is a real possibility. This could lead to a recession and even a depression (which we define as decline in global GDP in two consecutive years)!

The risks of a serious downturn in the US economy are fully recognised now. In fact the authorities in the US seem to be ready to do ?whatever it takes? to prevent a financial meltdown and economic downturn. The Federal Reserve has brought down its interest rate to virtually zero. The cost financial and fiscal bailout packages (including various guarantees) is now estimated to be over $7 trillion. In addition, there is a widespread expectation that Obama administration will launch an additional stimulus package which could be as large as $1 trillion. Unfortunately, the current stimulus approach in the US is not so different from the desperate stimulus packages following the collapse of tech bubble and 9/11 in the US, which probably laid the basis for the current crisis. The package is aimed at stimulating domestic demand funded by printing money (US$) which also happens to be the principal reserve currency of the world. With the high external debt of the US, the low rates of interest on US$ and the printing of fresh dollars in trillions for bailouts and stimulus, the confidence in the US $ may well weaken. If that happens, the global payment system may be disrupted and we may well have ?the mother of all economic crises? leading to a Great Depression.

Facing the prospect of a global economic catastrophe, the world leaders should be in over drive mode for designing preventive actions. The US stimulus package should be focusing on increasing net exports rather than domestic demand. And considering the risk of free fall of US dollar, the old ideas of Substitution Account and creation of Special Drawing Rights (SDRs) in the IMF should be revived. In order to allow the US to reduce its external deficits and external debt, there should be concerted devaluation of US dollar with respect to other major currencies. A large amount of SDRs (perhaps about $1 trillion equivalent) should be created to provide global stimulus, with larger share of SDRs allocated to countries (like the US and India) which do not have much fiscal space for stimulus packages. The weaknesses of monetary policy and private investment as well as the enhanced role of the public sector should be fully recognised in the current environment as Keynes argued so forcefully in the 1930s.

In this context, the process leading to the G20 Summit and its concluding Declaration are indeed disappointing. The hurriedly organised Summit was presided over by a lame duck President who seems to be more interested in saving the capitalist ideology than livelihood of the people. The Declaration makes a token recognition of the need to ?restore global growth? but there is not even a hint that under current conditions, public investment and other instruments of demand stimulation must play the key role. Instead, it waxes eloquence about ?shared belief that market principles, open trade and investment regimes, and effectively regulated financial markets foster the dynamism, innovation, and entrepreneurship that are essential for economic growth, employment, and poverty reduction.? In analysing the ?root causes? of the current crisis, the Declaration puts emphasis mainly on regulatory framework. It totally ignores the role played by the profligate macro-economic policies of the US which led to excessive domestic demand stimulation and weakening of the regulatory restraint in the financial sector. No effort was made to even hint at the role of reserve currency status of the US$ in explaining why such profligacy was continued so long and why the subprime crisis originating in one country became a global phenomenon affecting even highly regulated financial sectors in countries such as in China and India. Clearly, on present indications, G-20 is unlikely to become the ?Committee to Save the World Economy?.

?We are all Keynesians now? is the new mantra, even though one would not guess that from the G20 Declaration. And in the globalised economy of today, Keynesianism has to be practiced at a global level, and not just at a national level. Hopefully the next G-20 Summit will recognise that reality and move towards a global Keynesian package to save the world from repetition of the Great Depression of the 1930s.

The writer is Senior Adviser at Research and Information System for Developing Countries