Notes From Underground: The G-20 is in disarray no matter how much spin is applied (but it’s making us dizzy)

The British released their budget today and it was pretty much as advertised. George Osborne, the U.K.’s chancellor of the exchequer, announced VAT tax raises and other revenue enhancers in an attempt to trim the British budget. The discussion now turns to whether the budget will be too AUSTERE for the times. The fact that economic growth in the developed nations is anemic, at best, is raising concerns that the Brits and Europeans are removing fiscal stimulus at a time when the economic recovery is still too fragile.

There is a heated battle taking place among policy makers about whether to cut budget deficits now or wait until the global growth story is running on eigth cylinders rather than two. It is very similar to the political debate taking place in the U.S. between the fiscal expansion crowd and the TEABAGGERS. From Germany’s recent actions–cutting €80 billion from its budget over the next four years–Angela Merkel will be representing the Tea Party at the G-20 meeting. The Chinese were clever because they made their currency move during the weekend, which now sheds light on the fiscal profligacy/austerity debate.

President Obama helped fuel the stridency of the discussion when he sent out a letter to his G-20 colleagues on June 16. He wrote:

“The highest priority in Toronto must be to safeguard and strengthen the recovery … In fact, should confidence in the strength of our recoveries diminish, we should be prepared to respond again as quickly and as forcefully as needed to avert a slowdown in economic activity.”

These are not the words of a leader that is looking to pursue an immediate decrease in fiscal stimulus. The Germans are going to be the target of Obama and Geithner’s ire and will make any real cooperation impossible. Toss in the European nations’ desire for higher capital levels for global banking and it’s creating an aura of more dissonance. If fiscal austerity and higher bank capital ratios were agreed upon, we should all just buy BONDS and other long-term DEBT and wait for the Obama administration and the Bernanke-led Fed–they will not allow that to take place. (This is why we refer to this group as the ’37ers.)

We believe this mindset has been the basis behind GOLD’s role as the ultimate safe haven. The fear of deflation is the driving basis of monetary and fiscal policy in the U.S. But there’s a question all investors must ask: If deflation takes hold, how high does unemployment go? THE REST IS COMMENTARY!

In the letter, Obama makes another critical statement.

“But it is critical that the timing and pace of consolidation in each economy suit the needs of the GLOBAL ECONOMY [emphasis is ours], the momentum of private sector demand, and national circumstances. We must be flexible in adjusting the pace of consolidation and learn from the consequential mistakes of the past when stimulus was too quickly withdrawn and resulted in renewed economic hardships and recession.”

The president will be very unhappy with the German’s recently enacted austerity. Meanwhile, the Chinese have left the stage and the spotlight will focus on the aria to be sung by Frau Merkel in a tribute to Das Rhein GELD. Stay tuned to see how the fat lady sings.

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