The world must begin to address this. Much has been said about the euro zone and the US march toward a fiscal cliff, but there is almost no discussion of how the world’s growing financial surpluses can be steered toward productive investment in economic infrastructure.

The Financial Times recently published a sobering article titled ‘Panic has become all too rational’, where Martin Wolf describes how the West’s private sectors are afraid to either consume or to invest, thus generating financial surpluses. The IMF expects that the shift toward surplus in financial balance of the US private sector will be over 7 per cent of GDP between 2007 and 2012. Emerging countries are expected to have a surplus of US$450 billion this year and some US$20 trillion worth of pension funds are looking for investment opportunities.

These surpluses have driven some interest rates down to zero, or negative in real terms. According to Wolf, ten-year bond yields in the UK, the US and Germany are 1.54 per cent, 1.47 per cent and 1.17 per cent, respectively. The facts are clear: as in the 1930s, current monetary policies are failing to boost investment. Some governments have fiscal policy space but far too many of them have committed themselves, prematurely, to fiscal austerity at a time of deficient global demand. There is no prospect of a policy-driven sustained recovery in developed economies.

Wolf writes that until June 2012, he ‘had never really understood how the 1930s could happen. Now I do. All one needs are fragile economies, a rigid monetary regime, intense debate over what must be done, widespread belief that suffering is good, myopic politicians, an inability to co-operate and failure to stay ahead of events. Perhaps the panic will vanish. But investors who are buying bonds at current rates are indicating a deep aversion to the downside risks. Policy makers must eliminate this panic, not stoke it’.

The 2012 meeting of G20 leaders has not provided assurance that any of these potential ingredients of disaster will receive adequate attention. For example, their declaration indicates awareness of a negative ‘feedback loop between sovereigns and banks’ in Europe, but offers no credible solution. Similarly, acknowledgement of the need for long-term fiscal consolidation in the United States while avoiding a sharp and needless fiscal contraction in 2013 does not offer any strategy to avoid the widely expected gridlock and brinkmanship in Congress.

Day by day, there is less confidence about avoiding a serious shock to the global economy. That is leading to a lack of investment and spending that exacerbates the problem. It is urgent to restore some confidence by identifying a significant and expanding stream of effective demand.

An effective way to do so would be to turn the pent-up demand for infrastructure into a steady growth of effective demand in the order of trillions of dollars per year. A January 2012 World Bank Policy Research Working Paper explains the virtues of this strategy. Co-authored by its former chief economist, Justin Yifu Lin, the document advocates a globally coordinated initiative to invest in carefully selected infrastructure. An initiative of this type would be quite different from earlier government-led coordinated efforts to boost public consumption.

Using more private sector financial surpluses to finance economic infrastructure would be an investment in future productivity. Some Asian governments have succeeded in drawing the G20’s attention to this opportunity. In their 2012 declaration, G20 leaders ‘ask Finance Ministers and Central Bank Governors to consider ways in which the G20 can foster investment in infrastructure and ensure the availability of sufficient funding for infrastructure projects, including Multilateral Development Banks’ (MDBs) financing and technical support’.

It will not be easy to meet this important request. It takes time to fix a massive failure of international financial markets and it is unclear how the G20 process will take up the challenge. The Los Cabos Growth and Jobs Action Plan issued to back up the declaration makes no mention of this request. Nevertheless, after an inevitable delay due to preoccupation with the euro zone crisis, a coordinated initiative to catalyse private sector financing of infrastructure gaps may take shape.

To minimise costly delays, governments should discuss and analyse the nature of the global financial failure that is preventing private sector surpluses from flowing into economic infrastructure. And this discussion must address the following set of issues.

The cost of infrastructure bottlenecks can be readily estimated. Economic rates of return for eliminating these bottlenecks are certainly positive, but policy weaknesses across world economies may prevent these economic rates of return from being reflected in expected financial returns. For example, some developed economies may refuse investment from emerging economies in transport and communications infrastructure for reasons of ‘national security’. Likewise, in emerging economies, inefficiency and administrative problems such as barriers to land acquisition may deter private investors. Other sources of uncertainty include potential price controls and general perceptions of sovereign risk.

A recent report to the G20 by a High-Level Panel on Infrastructure proposed ways to reduce such uncertainties around infrastructure investment in low-income countries. They also proposed that multilateral development banks leverage private sector financing, for example by reducing sovereign and technical risks. This advice is being taken seriously.

Investments in economic infrastructure are inherently long-term. This is an issue for foreign exchange reserves or pension fund investors looking for liquid investments. And this, in turn, is a challenge for financial intermediation — but not an insurmountable one. Once again, multilateral development banks could create innovative investment vehicles. If they fail to do so, it may be time to create a new development financing agency whose governance reflects the evolving balance of the global economy. Existing or new international development finance agencies can be underwritten by major governments in ways that create the liquidity needed by investors of public or private financial surpluses.

At a time when the world is in danger of relapsing into a 1930s-style depression, such issues deserve more attention.

Andrew Elek is Research Associate at the Crawford School of Public Policy, Australian National University. He was the inaugural Chair of APEC Senior Officials in 1989.