IMF keeps digging

After six years of demand weakness, the likelihood of damage to potential output is increasingly a concern.

This is a key sentence in paragraph 13 of the note that the International Monetary Fund had prepared for the G-20 meeting that has ended. If, after six years of unprecedented quantitative easing, demand weakness has persisted, it behoves any intelligent person or institution to ask questions about the efficacy of measures adopted, rather than recommending more of it.

In paragraph no. 11, while calling for further monetary accommodation, the Fund document noted:

The expected boost in economic activity from lower oil prices has not materialized,..

Under normal circumstances, any responsible advice would be that the central banks should not be adding further stimulus to their economies in the light of the extraordinarily large stimulus coming from lower oil prices. The IMF, of course, does the opposite.It behoves an international institution to ask hard questions of the failure of the oil price drop to stimulate overall consumption.

The point is that hard questions are not being asked of the recovery model that has been followed so far in the last six years with little direct success and substantial side-effects.

What are the answers, then? That is the counter-question.

Here are they:

(1) Lower growth, globally, for quite some time is inevitable. Much global growth has been brought forward by the overuse of debt in the forty years since Bretton Woods was disbanded. Current dollar in GDP had gone up 5.6 times since 1980(and up to 2014) whereas the general government debt in these countries had gone up by 14.4 times. Acceptance of this reality is needed to stop digging further while in a hole. Current Fund advice is akin to that.

(2) Stimulus is needed but it has to be very specially tailored to the lower income segments of the population – those who cannot adjust.

(3) Others have to accept some painful adjustment.

(4) Creative destruction – a key function of capitalism – has to be allowed to play out. Only then, malinvestment done using years of excessive borrowing will be extinguished, paving the way for a resumption of good and essential investment.

(5) Continuing to borrow and print should stop. Global growth of the last forty years is not sustainable because it was conjured out of ‘paper’ – fiat money and bank credit. Sustainable growth might be slow and lower but what has happened in the last forty years is not the normal at all.


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