Tuesday 20 September 2011

DOUBLE-DIP RECESSION: IS THE IMF TO BLAME?

In mid-April 2011, I argued in a couple of postings that the world economy showed signs of structural weaknesses and that 2012 would entail an unavoidable recession, the inevitable double-dip, which should be moderated by the Obama jobs bill, tax-the-rich proposal and above all the fact that during election years the economy usually performs than the year of the swearing in ceremony.

On 20 September 2011, the IMF confirms with empirical data the world economy's slowing growth, and it forecasts a slower than previously predicted 2012, especially for the US, Japan and EU suffering from structural fiscal imbalances, sovereign debt problems, and contradictory policies between the FED that has a stimulative monetary policy and the European Union opting for a strong euro and anti-inflationary measures, but at the expense of slow growth.

The IMF report was published on the same day that Standard and Poors downgraded Italy's public debt, and on the same day of the FED meeting intended to provide some much needed stimulus for the US economy. The big surprise was that the IMF joined the US calling for the Europeans to pursue the same stimulative policy as the FED, a message that comes just as the US and Germany have been trying to smooth their differences about the debtor nations, especially Greece.

Given that Greek bonds are now trading 40 cents on the euro, this means at least a 60 percent 'haircut', and a 60 percent loss would mean that banks must have the backing of the European Central Bank (ECB). For this reason and to calm the markets, the IMF called on the ECB to cut interest rates, a policy that Germany as a surplus country and defender of a strong euro, has been resisting. For a long time I have argued that ECB raising rates, twice this year to 1.5%, would only slow growth in order to keep the euro the strongest reserve currency. The IMF has now joined the US and China. Pursuing an opposite policy toward China, the IMF called on China to maintain a monetary tighneting regime.

IMF and private economists' studies are not that far apart in showing a slower growth for the US, and continued robust growth for China, India, Brazil and Russia. The IMF now explains that its numbers were off because it never really expected the temporary rebound of 2010 to be sufficient for long-term sustained growth. The fact is that governments did not take the necessary measures to make sure that there was sustained growth beyond the rebound of 2010. Nor did the IMF call for a coordinated monetary policy between ECB and FED until now that the double-dip recession is already here.

The biggest problem however is that the IMF's policies across the world, especially among EU debtor (periphery) nations are the major cause for the double dip. It is austerity and neo-liberal IMF policies that has caused this double-dip recession. If the IMF had joined forces with the World Bank and central banks calling for 'easing' interest rates and at the same time pouring development funds into debtor nations instead of bankrupting them, then the strong banks of the advamced capitalist countries would not be confronting liquidity problems today.

The IMF never took into account not only the economic and social consequences on the broader society of debtor nations, but it never calculated the political cost of destabilization that contributes to economic volatility. In fact, the banks that are currently holding billions of euros and dollars in paper, part of which they must write off, have no one to blame but themselves for supporting the IMF as the citadel of finance capitalism, such as it has evolved as a major source of instability in the world.

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