The inflation expectations fairy

There are confidence fairies and there is the inflation expectations fairy. It's a 4% fairy apparently. I'll explain. So Krugman correctly points out always that the more fundamentalist neoclassical economists (the Talibans that love price flexibility and instantaneous adjustment to full employment, not the moderates that also believe in a natural rate, but think it takes a while to get to it like Krugman himself) believe that the economy would recover if only a proper environment for investment was created. Hence, if confidence returned we would have a recovery.

They obviously invert causality between confidence and recovery. As noted by Marriner Eccles long ago: "confidence itself is not a cause. It is the effect of things already in motion. (...) What passed as a 'lack of confidence' crisis was really nothing more than an investor's recognition of the fact that new plant facilities were not needed at the time." Investment is the result of a growing economy, in which firms tend to adjust their capacity to demand. No demand for your goods no need to invest to create capacity to produce more. Plain and simple.

Now a dispute on what is the appropriate policy for the Fed, and what has been Bernanke's role has developed between Krugman and Bernanke (see here and here) [Ball has a more academic paper saying basically the same as Krugman here]. They argue that Bernanke has been correct in pursuing quantitative easing -- the buying of long term Treasury bonds to keep not just short, but also long term interest low -- and saving banks, but he has been reluctant to increase the inflation target to 4%. Blanchard has said pretty much the same about the need for a higher inflation target (this was hailed as new thinking in macroeconomics; with that criteria when Greenspan disregarded the 6% natural rate of unemployment level, believing it was somewhat lower, he was a radical innovator!). [I’ll leave for another post the question of why are we even talking about an inflation target in the US if the Fed supposedly doesn’t have one].

Krugman notes that Greg Mankiw actually has sent a veiled (or not so veiled threat, as he is the advisor to Romney, which may or may not have something to do with Bernanke’s reappointment in the future), saying that “if Chairman Bernanke ever suggested increasing inflation to, say, 4 percent, he would quickly return to being Professor Bernanke” (originally published here, yep Mankiw also writes regularly for the NYTimes).

So what is the mechanism according to Krugman (and the ‘progressives’ like the IMF chief economist Blanchard) by which a higher inflation target would lead to a recovery. In Krugman’s own words:

"If the Fed were to raise its target for inflation — and if investors believed in the new target — expected inflation over the medium term, say the next 10 years, would be higher. … [and] higher expected inflation would aid an economy up against the zero lower bound, because it would help persuade investors and businesses alike that sitting on cash is a bad idea. "

So if the Fed says it’s willing to accept a higher level of inflation – without doing anything concrete and objective like intervening and forcing banks to refinance the mortgages of people in foreclosure – then if investors are persuaded they may be confident enough to spend more. And that’s not a fairy?! The problem with any theory, including the New Keynesian, that believes [or says it does in order to get published] that there is a tendency to full employment, is that it must end on some sort of confidence for spending story, since under normal conditions the system would actually do it anyways. The confidence fairy is dead; long live the inflation expectations fairy!

The IMF with a thorn on its side

By Martin Khor

A serious impasse emerged in the preparatory committee of UNCTAD XIII, which is tasked with preparing the draft outcome document that Ministers are scheduled to adopt at the end of UNCTAD XIII in Doha on 21-26 April.

While the previous two or three conferences were rather tame affairs, it looks like UNCTAD XIII (whose general theme is development-centred globalization) will be more difficult, with the organisation’s future scope of work and influence at stake.

UNCTAD was set up in 1964 to support developing countries to strengthen their weak position in international economic structures, and to design national development strategies.

It became a kind of secretariat on behalf of developing countries, providing a small pro-development balance to the huge organisations dominated by the developed countries, such as the OECD, the IMF and World Bank.

Read the rest here.

Also read this piece by Martin Khor too.

More on the "New IMF"

More evidence for the changes in our NIMF (New International Monetary Fund). In the executive summary to the last WEO, it argues that:

"Fiscal adjustment has already started, and progress has been significant in many economies. Strengthening medium-term fiscal plans and implementing entitlement reforms are critical to ensuring credibility and fiscal sustainability and to creating policy room to support balance sheet repair, growth, and job creation."

That is, not only they want continuing fiscal adjustment, but also cuts to entitlement programs like pensions (in IMF-speak its entitlement reform; one more for the English-IMF/IMF-English dictionary). Because fiscal consolidation (they mean austerity, cutting spending and increasing taxes) will lead to growth and job creation. Sounds new, doesn't it?

So does the IMF think that the periphery of Europe should not continue to tighten fiscal policy? Here is what they have to say:

"In the economies of the periphery [of Europe], a major task will be to find the right balance between fiscal consolidation and structural reform on the one hand and external support on the other, so as to ensure that adjustment in these economies can be sustained."

So external support yes, and of course continue with the adjustment. And yes in IMF-speak structural adjustment means cuts in social programs, or entitlement reform. Again nothing like the fresh new approach at the Fund.

And in Latin America? Well no worries they also have a new approach. For them:

"Some emerging market economies are contributing more domestic demand than is desirable (for example, several economies in Latin America); ... [Latin America] needs to restrain strong domestic demand by considerably reducing structural fiscal deficits and, in some cases, by further removing monetary accommodation."

Yes, more contractionary fiscal and monetary policies. The NIMF is full of 'new' ideas! Uhm, that nice smell of new policy measures!

The New IMF and Argentina

There has been a certain view, that was already quite popular around the time Strauss-Kahn still managed the IMF, that with Christine Lagarde the Fund has become less orthodox, not just regarding capital controls, but now also supposedly on fiscal issues. See for example the article in the NYTimes by Liz Alderman.

In the last World Economic Outlook, the Fund argues (WEO, p. 110) that Argentina's inflation results from excessively expansionary policies (no analysis backs this claim and the effects of a more devalued currency and commodity prices are not discussed) and suggests (p. 42) that monetary tightening is necessary. Also, the report continues the tone of the previous WEO, suggesting that in developed countries fiscal adjustment should continue to reduce the debt burden, and in developing ones, like Argentina, to avoid overheating.

So fiscal and monetary contraction is their policy advice. The IMF forecasts a significant slowdown next year for Argentina (4.6% for 2012 down from 8% this year). The logic is that Argentina's growth is not sustainable and perhaps a crisis is around the corner.

Andrés Velasco, ex-finance minister of Chile, suggests so much in his last column for project syndicate. This notion that Argentina is close to an external crisis is peculiar to say the least. Velasco had published a paper with Ricardo Hausmann after the 2001-2 crisis that recognized that the problems were not fiscal, but related to exchange rate misalignments, export performance and access to international financial markets.

Although shrinking, Argentina still has a current account surplus, has not depended on international financial inflows (but on its own exports), and the ratio of short term external obligations to reserves is relatively small. So if the whole world economy sinks into lower growth, Argentina, that is forecasted to be the second fastest growing economy after China in 2011, will probably slowdown, but there is no reason for the macroeconomic policy to push for a slowdown for fears of an external crisis.

In that sense, it seems that the default position at the Fund, and in mainstream academic circles (Velasco was at Harvard, before returning to Chile) is that fiscal adjustment is needed in Argentina. And apparently almost anywhere in the world. The New IMF looks a lot like the old one to me!

The IMF still believes in fiscal austerity

In May, Olivier Blanchard, the head of the research department at the IMF, said:

"Earlier fears of a double-dip recession—which we did not share—have not materialized... The inventory cycle is now largely over and fiscal stimulus has turned to fiscal consolidation, but private demand has, for the most part, taken the baton."

The lame excuse for this ludicrous forecast now is that:

"the initial U.S. data understated the size of the slowdown itself. Now that the numbers are in, it is clear that more was going on."

In all fairness I criticized that view in May (here) and in July (here), since it was clear that fiscal austerity (Blanchard says consolidation, but he means reduction of spending and increases in taxes, that is austerity measures, which may not lead to a reduction in deficits, i.e. consolidation; one day I'll publish the IMF-English/English-IMF Dictionary) would not work.

Now that he admits that private demand has not taken the baton you think he would admit that fiscal consolidation (austerity really) is not the solution. You would be wrong, of course. He says in the new World Economic Outlook foreword (WEO, Sept, 2011) that:

"Fiscal consolidation cannot be too fast or it will kill growth. It cannot be too slow or it will kill credibility."

Not very different from what Christine Lagarde, his boss, has been saying. That is, we need fiscal austerity, but not too much (see my critique here). The new claim (in the last WEO) is that China has to import more, since the US private demand will not pick up (and fiscal austerity is needed).

By the way, according to the IMF China will grow 9.5% in 2011, and the yuan has appreciated strongly in real terms (particularly when you deflate by the real wage, that grows astronomically in China). So it's unclear how China could, besides growing sufficiently fast to keep a good chunk of the world economy (in particular exporters of commodities) expanding, also get the US out of its recession.

Perhaps, Blanchard and the IMF should revise their views on fiscal policy for developed countries (the IMF could also change it's adjustment programs based on austerity in Europe too!).

Cross post at TripleCrisis

The current policy consensus in the developed world (i.e. the United States and Europe) seems to be that fiscal austerity (the euphemism used these days is consolidation) is necessary. Christine Lagarde, the new Managing Director of the International Monetary Fund (IMF), said recently in the Financial Times that: “fiscal adjustment must resolve the conundrum of being neither too fast nor too slow.”

That is what she refers to as “Goldilocks fiscal consolidation,” that is, cut spending and increase taxes, but slowly please! She repeated this view in her talk at the Jackson Hole conference, arguing that in order to obtain “credible” consolidation governments must implement: “measures that change the rate of growth of entitlements, health or retirement.” In other words, cut spending and increase taxes fundamentally on social programs that benefit overwhelmingly the poor.

Read the rest here.

Global Monetarism Strikes Back



Olivier Blanchard, the chief economist at the International Monetary Fund (IMF) announced in a triumphalist tone that “earlier fears of a double-dip recession—which we did not share—have not materialized” and defended the need for “fiscal consolidation that is neither too fast, which could kill growth, nor too slow, which would kill credibility.” For Blanchard fiscal expansion has done its job, since “private demand has, for the most part, taken the baton.” The risks are associated to the higher prices of commodities and inflation. The Bank of International Settlements (BIS) has added to the IMF’s view that inflation is the main risk on an otherwise recovering world economy. In their recent Annual Report they argue that: “spread of inflation dangers from major emerging market economies to the advanced economies bolsters the conclusion that policy rates should rise globally.” That is, add monetary contraction to the policy mix.

Read the rest of the entry here.

Many Economies, Just One Medicine

The IMF in its last Fiscal Monitor suggests that developed countries must adjust because public debt is growing out of hand, and Latin American (and other developing regions) should do fiscal adjustment because their economies are overheated.  First, the graph below shows public debt in four developed countries.  It is clear that in all debt-to-GDP ratios went up after the crisis.  In other words, public debt is the result of the crisis not is cause.



It is important, also, to remember that the crisis has destroyed private wealth (even though governments went out of their ways to compensate some for their losses, in particular the big banks that got us into the crisis).  If private debt falls, and with it private demand, then public demand (spending) has to increase to compensate, unless one wants lower levels of activity.  So it is far from clear that the increase in public debt is problematic at all, and surprising that the “reformed” IMF already is pushing for contraction (note that the IMF has a central role in promoting brutal fiscal adjustments in Eastern Europe and the periphery of the euro too).

But what is really interesting is that if increasing public debt is a sign of dangerous fiscal profligacy, one would expect that Fund to at least be more lenient with countries that have constant or decreasing public debts.  The figure above shows the case of four Latin American countries.

In other words, if debt increases do fiscal adjustment. If debt falls do fiscal adjustment.  I’m starting to think the IMF is always for fiscal adjustment.  Instead of Dani Rodrik’s One Economics, Many Recipes, their motto is Many Economies, Just One Medicine.



Who will succeed DSK?

There is a lot of fuss about who should be the next managing director of the IMF. The French have held the position for more than 30 years, and a European has always been at the helm of the IMF. Thus, the voices of protest for a broader representation, more transparency and a democratic process have been raised. Raghuram Rajan, former chief economist at the IMF, has suggested (subscription required) that we need a technical/market economist rather than a politician running the Fund.

“The fund is designed to push tough policies to straighten out countries that have mismanaged finances, not win a popularity contest. When it colludes with politicians to propose politically palatable programs, the IMF fails in its proper role of reforming a country.”

Interestingly enough the idea is that good policies are painful ones. The sadomasochistic vein in mainstream economics runs deep. Rajan means that the IMF is needed to impose fiscal contraction, and it should be independent from politicians, like central banks (I'll leave that for another post). He then suggests that IMF should:

“set up a selection committee of worthies: Larry Summers, Jean Claude Trichet, Ernesto Zedillo, and so on.”

In other words, the independent guys that deregulated financial markets, imposed brutal contraction in the European periphery and commanded over the Mexican Tequila (Zedillo inherited the crisis from Salinas, to a great extent, but shared the neoliberal principles) respectively (among other things). It would be like having Count Dracula in charge of the Red Cross blood donation program.

Further, Mr. Rajan peddles the need for a non-European to head the IMF and cites the usual names (Armínio Fraga, Trevor Manuel, Montek Ahluwalia, Tharman Shanmugaratnam, only missing Agustín Carstens in the lists of developing country’s economists cited for the position). The common denominator is that all of them would maintain policies that are essentially more of the same, and will not push the IMF to revise their adjustment policies. If these are the candidates they might as well appoint a European to do the dirty job!

The question is not so much whether the selection is done by notables (even though one may want less notorious people than the ones in Rajan’s list) or other lesser beings, or even whether the new managing director will come from the colonies (sorry, the developing countries) or Europe. The question is whether the IMF is going to change its ways and understand that pro-growth and employment generating policies should be painful to capital, not labor. We need capital controls and fiscal expansion, to create jobs.

Do what I say not what I do

These days there is a great amount of praise for the IMF's changing views, on everything, from the rethinking of macroeconomics, to their admission that capital controls might be good.  I remain very skeptical, and that's why it was great to read Mark Weisbrot's last piece on the IMF. He reminds us that:

"Unfortunately the IMF's
practice still does not match its rhetoric or even, increasingly, its own
research.  In Greece, Ireland, Spain, Portugal, Latvia and other
countries, the Fund is still involved in the implementation of 'pro-cyclical'
policies that will keep these countries from recovering for a long time."

How do you call a person (or institution) that says one thing, but then does another?!

Is there something in the water at the IMF?

via Mark Thoma, Economist's View

The paper:IMF on inequality and growth



Whilst I haven't yet taken the time to delve into the 'metrics, this looks to be an interesting survey and addition to one of the fundamental macro questions: whence growth. Interestingly, the authors highlight the finding of the importance of (the lack of) inequality for continuation of "growth spells."



Given its history, it's fairly stunning that this would emanate from the IMF. Further, I think it's time to do a really good syllabus on the topic of growth and inequality. Inequality mavens, send us your links!



I'll be reading this one more closely, especially in the context of Matias' immediately preceding post.

Like Greece & Ireland, IMF Shouldn't Help Portugal

Now I'm hopping mad! I know that I'm beginning to sound like a broken record on this, but in the interest of fairness, I will fight the good fight even if no one else will do so. Bravely I must soldier on in this bleak and unbearable world. Previously, I have argued that the IMF should not have bailed Greece out because its problems were primarily of the fiscal sort (accumulating a debt too large to service), not the balance-of-payments sort (having insufficient foreign exchange to pay for necessary imports like food and energy).

I've also said that bailing out Ireland was an indecent financial proposal since its woes stem primarily from the state guaranteeing its banks' solvency without fully realizing the magnitude of such commitments. Insofar as the IMF remains an institution dedicated to dealing with balance of payments problems, we have an identical main problem with IMF lending to Ireland and Portugal. While theirs are somewhat dissimilar woes, what they have in common with Greece is not having a BOP problem which would oblige the IMF to act according to its Articles of Agreement.

Even the IMF describes its activities in Ireland as support for recapitalizing nearly insolvent lenders which have, in turn, tested the solvency of the Irish state. Witness:

Ireland’s banks are at the heart of the current crisis. Massive lending during the boom years left banks heavily exposed to the Irish property market, which has yet to stabilize despite a steep fall in housing prices of 36 percent since the peak in 2008. At the height of the boom, the assets of domestic banks amounted to five times Ireland’s gross domestic product, with real estate loans making up close to 30 percent of all loans in 2006.

Such an oversized banking system is no longer sustainable, not least because of the ongoing weakness of the property market in Ireland. The problems have resulted in a loss of deposits and market funding, and have made Irish banks overly dependent on financing from the European Central Bank. The banking sector therefore needs to be restructured and recapitalized.

There isn't even an allusion to balance of payments woes, precisely because Ireland doesn't suffer from them.

And so it is the case once more with Portugal. Sharing a common currency with its main trading partners in the Eurozone, the euro is also a standard global reserve currency that is second only to the US dollar in terms of reserve holdings. But Portugal may have trouble obtaining euros, you say? As late as February, the ECB had a facility for purchasing sovereign issuances which it used to help out Portugal. So, Portugal could have just issued more IOUs and sold them to the ECB:

The European Central Bank has intervened in eurozone bond markets for the first time in weeks, buying Portuguese debt amid fears that the country could yet seek an international rescue. The ECB returned to the market on Thursday as Portugal’s cost of borrowing on 10-year debt jumped to a euro-era high of 7.63 per cent, traders said. The ECB temporarily suspended its bond-buying programme in mid-January.

The real triggers for Portugal asking for help from the European Financial Stability Facility (EFSF)/IMF are a nuber of things. First, the outgoing PM Jose Socrates failed to pass austerity measures, displeasing powers-that-be in Brussels who had hoped Portugal could avoid another massive bailout episode. Absent political leadership (Socrates resigned and there will be parliamentary elections come June 5) and a credible plan for getting its fiscal woes under control, the ECB inevitably tired of purchasing Portugese debt as a lifeline and asked Lisbon to formally ask for help. Financially, servicing EUR 10B of maturities due in June is virtually impossible. Hence the cry for mercy.

My argument in the Portugese case is similar to the Greek one: In the main, fiscal woes--overindebtedness--is to blame, not BOP problems. Although the IMF may be giving its support to Eurozone countries to help quell systemic disturbances in the international monetary system, that isn't what it was tasked for as I keep repeating.

It's also a matter of fairness to LDCs. Most likely, poor countries aren't contributing to the IMF so that their funds will be used to bail out rich countries suffering not from BOP problems but from fiscal ones. So, not only is it a misallocation of funds, but also a miscarriage of global governance. By all means, let the Europeans help out one of their own--but without IMF funds.

The world is an unfair place, but it was like that long before I got here.

IMF Managing Director Dominique Strauss-Kahn Calls for New Global Approaches to Post-Crisis World

Editor's Note:  Can anyone say "Problem, Reaction, Solution"?  Clearly the global elites are capitalizing on the Global Political Awakening; in large part, deliberately engineered by them, to make the people of the world beg for a New World Order in the form of a One World Government and Global Currency.  You can certainly plan on the economic crises to worsen significantly before the solution is fully implemented.


“In designing a new macroeconomic framework for a new world”, he stated, “the pendulum will swing—at least a little—from the market to the state."

IMF

In a speech entitled “Global Challenges, Global Solutions” at George Washington University in Washington, D.C. today, Mr. Dominique Strauss-Kahn, Managing Director of the International Monetary Fund (IMF), called for a new approach to economic policymaking in the wake of the recent global crisis. He singled out three areas for improvement: a new approach to macroeconomic and financial sector policies, a new approach to social cohesion, and a new approach to cooperation and multilateralism.

Discussing the current economic situation, Mr. Strauss-Kahn noted that the global recovery is unbalanced both between and within countries, and the global outlook is still beset by uncertainty. He pointed in particular to the Middle East, noting that it is going through an “historic transformation” as “citizens are seeking greater freedom, and a fairer distribution of economic opportunities and resources”. The immediate challenge for the Middle East, he stated, was “to preserve social cohesion without undermining macroeconomic stability”.Turning to global macroeconomic policies, Mr. Strauss-Kahn argued that policy must go beyond price stability, and look to financial stability, incorporating macro-prudential tools. The crisis has showed the value of fiscal policy, which had been the “neglected child” of the policy toolkit. Mr. Strauss-Kahn also called for more progress with financial sector reform, including across borders, and called for a financial activities tax.

“In designing a new macroeconomic framework for a new world”, he stated, “the pendulum will swing—at least a little—from the market to the state, and from the relatively simple to the relatively more complex”.

Mr. Strauss-Kahn called for policymakers to pay more attention to inequality and social cohesion. “The lethal cocktail of prolonged high unemployment and high inequality can strain social cohesion and political stability, which in turn affects macroeconomic stability.” He suggested that inequality, which was a factor in the Middle East, might also have been among the root causes of the global crisis, and that sustainable global growth is associated with more equal income distribution.

“We need a new form of globalization, a fairer form of globalization, a globalization with a more human face”, he said. “The benefits of growth must be broadly shared, not just captured by a privileged few. While the market must stay center stage, the invisible hand must not become the invisible fist”.

Mr. Strauss-Kahn stressed the virtues of enhanced cooperation and multilateralism in the post-crisis world, noting that “the great challenges of today all require a collective solution”. He cautioned countries against using currencies or trade restrictions for short-term gain.

“In such a world, multilateral institutions—as forums of global cooperation—will become even more important. But they must stay relevant. They must adapt to the new globalization,” Mr. Strauss-Kahn stated. He pointed out that the IMF is striving to better understand the complex interconnections running through the global economy and to strengthen its ability to prevent crises, not only manage them. But this requires legitimacy, he noted, making the recent IMF governance reforms particularly important.

Enter your email address to subscribe to our newsletter:


Delivered by FeedBurner

US, France call for flexible exchange rates at G20

G20 seeking monetary reform
© AFP/File Karen Bleier

AFP

NANJING, China (AFP) - French President Nicolas Sarkozy and US Treasury Secretary Timothy Geithner on Thursday called for more flexible exchange rate regimes as G20 nations met on global monetary reform in China.

The pair, speaking at the start of a day of talks in the eastern city of Nanjing, also called for a widening of the basket of currencies underlying the IMF's international reserve asset, while keeping the dollar and euro stable.

The West wants to see the yuan become part of the International Monetary Fund's Special Drawing Rights (SDR) basket as part of its efforts to prod Beijing into opening up its tightly managed and controversial currency regime.

"It's clear we must move towards a more flexible exchange rate system that would allow the world to absorb shocks. But this system cannot evolve without rules, coordination and oversight, or instability will prevail," Sarkozy said.
Geithner echoed his comments, saying the gap between flexible and managed exchange rate policies -- and the problems such a divide creates -- was "the most important problem to solve in the international monetary system today".

 "This asymmetry in exchange rate policies creates a lot of tension," Geithner said, noting that it "magnifies upward pressure" in emerging markets with flexible exchange rates and "intensifies inflation risk in those emerging economies with undervalued exchange rates" -- a clear reference to China.

The seminar -- bringing together ministers and central bankers from the world's leading economies, as well as a select group of academics -- was organised by France, which holds the Group of 20's rotating presidency.

French Finance Minister Christine Lagarde hailed the meeting as a "real success" and said participants had agreed on the need to expand the role of the IMF to monitor global economic imbalances.

The meeting, which took place as the global recovery faces major hurdles such as Japan's quake-tsunami disaster and the ongoing eurozone debt woes, aimed to hone in on key ways to reform the monetary system.

China had ruled out any discussion of its exchange rate regime despite ongoing criticism that the yuan is massively undervalued, giving its exporters an unfair trade advantage, but the issue nevertheless surfaced.

 Chinese Vice Premier Wang Qishan vowed Beijing would "work with the rest of the international community" to ensure the "economic order will move towards a just and equitable and win-win direction".

Sarkozy called on the G20 to agree on a timetable for widening a basket of currencies determining the value of the SDR, which now only includes the dollar, euro, yen and pound.

"Isn't it time to agree on a calendar for the expansion of the SDR basket to new currencies from emerging nations, such as the yuan?" Sarkozy said.

"We must support the inevitable internationalisation of the world's major currencies," he added.

"This of course does not mean calling into question the crucial roles of the dollar and euro, which must remain stable."

Geithner said those countries whose currencies eventually become part of the SDR basket "should have flexible exchange rate systems".

Nobel prize-winning economist Robert Mundell agreed, telling reporters that an expansion would enable the IMF to "help Europe more and other countries that are in financial difficulties".

Chinese central bank governor Zhou Xiaochuan welcomed the calls but said Beijing was not in a hurry for the yuan to be added to the basket, Dow Jones Newswires reported.

European Central Bank President Jean-Claude Trichet said such a move would depend on the yuan being fully convertible and free-floating.

Including the yuan in the basket would "entail a hefty appreciation" of the unit, and China is "unlikely to be able to stomach the necessary steps", Alistair Thornton, a Beijing-based analyst for IHS Global Insight, told AFP.

At a meeting in Paris in February, the G20 agreed to a set of indicators to measure economic imbalances between surplus exporters such as China and nations with structural deficits such as the United States.

In Nanjing, though, such imbalances "will not be at the centre of discussions," one Western diplomat said earlier.

IMF chief Dominique Strauss-Kahn urged countries to take steps to reinforce the global monetary system, warning failure to do so would leave it "vulnerable".

"The international monetary system we have is not broken, but it has serious holes in it -- holes that get bigger and bigger as globalisation increases," he said.

© AFP -- Published at Activist Post with license

Enter your email address to subscribe to our newsletter:


Delivered by FeedBurner

The Collapse of Globalization

Chris Hedges
TruthDig

The uprisings in the Middle East, the unrest that is tearing apart nations such as the Ivory Coast, the bubbling discontent in Greece, Ireland and Britain and the labor disputes in states such as Wisconsin and Ohio presage the collapse of globalization. They presage a world where vital resources, including food and water, jobs and security, are becoming scarcer and harder to obtain. They presage growing misery for hundreds of millions of people who find themselves trapped in failed states, suffering escalating violence and crippling poverty. They presage increasingly draconian controls and force—take a look at what is being done to Pfc. Bradley Manning—used to protect the corporate elite who are orchestrating our demise.

We must embrace, and embrace rapidly, a radical new ethic of simplicity and rigorous protection of our ecosystem—especially the climate—or we will all be holding on to life by our fingertips. We must rebuild radical socialist movements that demand that the resources of the state and the nation provide for the welfare of all citizens and the heavy hand of state power be employed to prohibit the plunder by the corporate power elite. We must view the corporate capitalists who have seized control of our money, our food, our energy, our education, our press, our health care system and our governance as mortal enemies to be vanquished.
Adequate food, clean water and basic security are already beyond the reach of perhaps half the world’s population. Food prices have risen 61 percent globally since December 2008, according to the International Monetary Fund. The price of wheat has exploded, more than doubling in the last eight months to $8.56 a bushel. When half of your income is spent on food, as it is in countries such as Yemen, Egypt, Tunisia and the Ivory Coast, price increases of this magnitude bring with them malnutrition and starvation. Food prices in the United States have risen over the past three months at an annualized rate of 5 percent. There are some 40 million poor in the United States who devote 35 percent of their after-tax incomes to pay for food. As the cost of fossil fuel climbs, as climate change continues to disrupt agricultural production and as populations and unemployment swell, we will find ourselves convulsed in more global and domestic unrest. Food riots and political protests will be inevitable. But it will not necessarily mean more democracy.

The refusal by all of our liberal institutions, including the press, universities, labor and the Democratic Party, to challenge the utopian assumptions that the marketplace should determine human behavior permits corporations and investment firms to continue their assault, including speculating on commodities to drive up food prices. It permits coal, oil and natural gas corporations to stymie alternative energy and emit deadly levels of greenhouse gases. It permits agribusinesses to divert corn and soybeans to ethanol production and crush systems of local, sustainable agriculture. It permits the war industry to drain half of all state expenditures, generate trillions in deficits, and profit from conflicts in the Middle East we have no chance of winning. It permits corporations to evade the most basic controls and regulations to cement into place a global neo-feudalism. The last people who should be in charge of our food supply or our social and political life, not to mention the welfare of sick children, are corporate capitalists and Wall Street speculators. But none of this is going to change until we turn our backs on the Democratic Party, denounce the orthodoxies peddled in our universities and in the press by corporate apologists and construct our opposition to the corporate state from the ground up. It will not be easy. It will take time. And it will require us to accept the status of social and political pariahs, especially as the lunatic fringe of our political establishment steadily gains power. The corporate state has nothing to offer the left or the right but fear. It uses fear—fear of secular humanism or fear of Christian fascists—to turn the population into passive accomplices. As long as we remain afraid nothing will change.

Read Full Article

Enter your email address to subscribe to our newsletter:


Delivered by FeedBurner

IMF on Expanding Special Drawing Rights' Int'l Role

In March of 2009, People's Bank of China Governor famously made his "Reform the International Monetary System" speech. Until now, we still do not have a clear reason why he made this speech. A Chinese colleague suggested it was to appease Chinese politicians who had grown tired of the export lobby's continuing predominance in policy circles. (No, the Communist Party is not monolithic.) In any event, Zhou reiterated the Chinese view that the United States' exorbitant privilege of issuing the world's standard reserve currency allowed it to abuse the aforementioned system. The United States, in effect, gave in to the temptation to flood the world economy with uncontrolled dollar emissions. His suggestions were many, including broadening the world's reserve currencies to reflect the shifting global balance of economic power. Among other things, expanding the role of the IMF's special drawing rights (SDRs)--a form of currency serving as money only within Bretton Woods institutions--to encompass trade and reserve accumulation functions was mooted by Zhou.

Lost in the piles of post-worthy material I have accumulated (apologies) is a recent IMF paper that assesses whether expanding the role of SDRs would improve the stability of the international system. My quick read? Yes, it may, but there are significant political hurdles along the way that need to be surmounted. What follows is the overview of the paper; the rest is well-worth reading especially for IPE junkies, global imbalance addicts, and other sorts with obsessive-compulsive tendencies. Enjoy?
------------------------------------------

Overview

- The SDR has enjoyed renewed attention lately in the context of debates on international monetary reform. To be sure, the term SDR has been used to refer to three different concepts—(i) a composite reserve asset created in 1969: the “official SDR” as defined in the Fund’s Articles; (ii) a potential new class of reserve assets: tradable SDR-denominated securities issued by the Fund or an investment vehicle backed by a subset of the Fund’s membership; and (iii) a unit of account, which could be used to price internationally traded assets (e.g., sovereign bonds) and goods (e.g., commodities), to peg currencies, and to report balance of payments data. All three are discussed here.

- In these different roles, the SDR might help serve respectively the following objectives: reducing the extent and costs of international reserve accumulation; augmenting the supply of safe global assets and facilitating diversification; and reducing the impact of exchange rate volatility among major currencies. Expanding the SDR basket to major emerging market currencies presents trade-offs, but could further support these objectives.

- In order to make a difference in any of these areas, the role played by the SDR would need to be enhanced considerably from its current insignificant level. Very significant practical, political, and legal hurdles would need to be overcome in the process. Given the potential benefits however, experimental steps along the lines outlined here could be considered in the years ahead. In this spirit, the paper open-mindedly puts forward a broad range of options for debate. As the international community comes to a firmer view on the SDR’s potential role, the most promising options could be assessed further.

- Clearly, problems in the international monetary system (IMS)—persistent global imbalances, large and volatile capital flows, exchange rate gyrations disconnected from fundamentals, insufficient supply of safe global assets—are complex and call for an array of remedies—global policy collaboration and stronger surveillance, enhanced systemic financial safety net, financial deepening in emerging markets and more generally development of new reserve assets. The issue is whether there is a helpful role to play for the SDR amid these solutions. This paper suggests there might be.

Reform Interruptus: IMF Kudos for Pre-Crisis Libya

This post is a follow-up to one I have just made on the reformist direction Libya was headed prior to the present crisis. In no small part due to Saif al-Islam Qadhafi's prodding, there were indications that the state was indeed normalizing itself as a market-based economy.

From the last (meaning previous, one hopes) Article IV IMF consultation dated 9 February 2011, we gather a number of interesting factoids:

An ambitious program to privatize banks and develop the nascent financial sector is underway. Banks have been partially privatized, interest rates decontrolled, and competition encouraged. Ongoing efforts to restructure and modernize the CBL are underway with assistance from the Fund. Capital and financial markets, however, are still underdeveloped with a very limited role in the economy. There are no markets for government or private debt and the foreign exchange market is small.

Structural reforms in other areas have progressed. The passing in early 2010 of a number of far- reaching laws bodes well for fostering private sector development and attracting foreign direct investment. The success of the new laws, however, hinges on promoting inter-agency coordination and open consultation with the legal and business communities, and establishing permanent bodies to monitor, assess, and oversee implementation. A comprehensive civil service reform is needed to facilitate more effective wage and employment policies that would address the needs of a young and growing labor force.

Recent developments in neighboring Egypt and Tunisia have had limited economic impact on Libya so far [sure...whatever]. To counter the impact of higher global food prices, the government abolished, on January 16, taxes and custom duties on locally-produced and imported food products. Later in January, the government also announced the creation of a large multi-billion dollar fund for investment and local development that will focus on providing housing for the growing population.

Call it Bretton Woods postcards from the edge. So the IMF observed two trends it welcomed in moving away from reliance on oil revenues for growth and towards private sector employment to provide work to a young population. I guess the speed at which it had moved towards both has not proven to be fast enough to outrace regional events:

Executive Directors agreed with the thrust of the staff appraisal. They welcomed Libya’s strong macroeconomic performance and the progress on enhancing the role of the private sector and supporting growth in the non-oil economy. The fiscal and external balances remain in substantial surplus and are expected to strengthen further over the medium term, and the outlook for Libya’s economy remains favorable. Directors saw as the main challenges the need to provide employment opportunities for a young and growing labor force, and the steadfast implementation of reforms to diversify the economy and reduce the high dependence on oil revenue.

The entire text is not very long and is well worth reading for a glimpse of the Libya just before tumult engulfed the Gulf. The dry text aside, you can see why even the Washington-based pooh-bahs welcomed the direction it was heading. Again, how would you have helped normalize global relations with a pariah state but through commercial exchanges? The Qadhafi clan's siege mentality to recent events is a regrettable regression, though recent indications suggested that Libya was indeed headed in a different direction. Go ask the IMF.

Critics of those who sought to de-isolate Libya should remember that. To paraphrase a certain commercial, this was becoming less and less Moammar's country.

Indonesia Mounts Its Defence in Int'l Currency War

Just a little over a decade ago, Indonesia was the epicentre of the Asian financial crisis. In a matter of months, the local currency, the Indonesian rupiah (IDR), had lost eighty percent of its value as foreign investors fled the country as quickly as they came. After all, they call it "hot money" for a good reason. Amidst all this were food riots, race riots, and various separatist movements trying to take advantage of the seeming loss of control by the central government. By 1998, harsh IMF conditionalities had helped ease out the long-running Suharto regime.

But that was then and this is now. The--how should I describe them--flatulent fiscal and monetary policies of the Americans, currency warriors extraordinaire, now threaten to overwhelm Indonesia's financial stability. Like in so many other countries in the region, the nearly unlimited ammunition the Yanks threaten to use causes asset bubbles, inflation, and a diminution of export performance.

And so it has come to pass that our Indonesian colleagues have sounded the warning bells. While not slapping capital controls per se, there has been considerable use of macroprudential measures such as increasing reserve requirements. It should be noted that the Chinese use a lot of this tinkering as well:

Indonesia said it will tighten rules on banks’ foreign-exchange holdings and overseas borrowing to cope with capital inflows that have pushed up inflation and strengthened the rupiah this year. Bank Indonesia will also reintroduce a 30 percent cap on lenders’ short-term overseas borrowing to minimize the risk of sudden capital outflows, it said yesterday. Banks must set aside 5 percent of their total foreign-exchange holdings as reserves as of March 2011, from 1 percent currently, Deputy Governor Budi Mulya said at a press briefing in Jakarta yesterday. The reserve requirement will rise to 8 percent effective June.

“These rules will ease pressure on the rupiah,” said Anton Gunawan, chief economist at Jakarta-based PT Bank Danamon Indonesia. “The central bank wants to absorb excess liquidity in the banking system.” Indonesia and its peers are grappling with increasing capital inflows as borrowing costs and growth rates that are higher than those of developed economies boost the appeal of emerging-market assets. Taiwan tightened curbs on exchange-rate derivatives this week and South Korea plans similar measures, according to an official at the country’s financial regulator...

Bank Indonesia has resisted imposing capital controls or raising its benchmark interest rate from a record-low 6.5 percent, choosing instead to increase bank reserve requirements and encourage investors to keep their money in the country for longer periods. The current benchmark rate is consistent with Indonesia’s goal of achieving inflation of 4 percent to 6 percent in 2011 and 3.5 percent to 5.5 percent in 2012, Mulya said yesterday.

The higher foreign-exchange reserve ratios may absorb as much as $3 billion in excess liquidity, and are “prudent banking” measures aimed at helping Southeast Asia’s largest economy cope with capital inflows, Mulya said. “If money is pulled into the reserve requirement then it cannot circulate within the system,” said Purbaya Yudhi Sadewa, an economist at PT Danareksa Research Institute in Jakarta. “That’s a disincentive to avoid banks attracting too much dollar since they must pay interest on that dollar whereas the money is put away at Bank Indonesia, which may not even earn interest.”

Lenders will be required to limit their short-term overseas borrowing to no more than 30 percent of their capital starting in January, the central bank said. The rule aims to encourage a shift to long-term foreign borrowing and reduce the risk of sudden reversals in capital flows, it said. The requirement was scrapped in 2008 because of the global financial crisis...

Five state-owned Indonesian financial institutions, including PT Bank Mandiri, have given their commitment to buy back bonds to ease the impact of sudden capital outflows during a crisis, Agus Suprijanto, acting head of fiscal policy at the Finance Ministry, said this week. The government is still in talks over the use of their funds and will prioritize funding from the state budget for any buybacks, he added.

Indonesia will also require lenders with assets of at least 10 trillion rupiah ($1 billion) to announce their prime lending rates, effective in March 2011. This rule will push banks to decrease their net interest margin and become more efficient, the central bank said. Lending growth may reach 22 percent this year, it said.

Bridging the Asian financial crisis era of foreign exchange pouring out and today's Indonesia with money pouring in, keep in mind that former Indonesian Finance Minister Sri Mulyani Indrawati has become a managing director at the World Bank for her widely praised efforts to stabilize Indonesia's economy post-financial crisis. Aside from reining in foreign short-term borrowing, she also did much to address the pervase corruption of the Suharto era. We wish our fellow Southeast Asians all the best, and I guess it's better to have problems dealing with excessive foreign exchange inflows instead of the opposite, right?

Markets Ponder China Bailing Out Europe (Again)

OK, OK, so I am using the term "bailing out" in a very loose sense: For instance, China has not quite said that its continued patronage of US debt in the wake of the financial crisis is specifically to bail out America. Rather, it's always couched in diplomacy-speak such as preserving "stability" in the global financial system as a certain Yankee diplomat-beggar would put it.

I almost missed the clip above of LSE IDEAS' very own Niall Ferguson arguing that the Chinese should help bail out China on Fareed Zakaria's GSP programme. (Despite what our school paper says, he does work here.) This theme has been a continuing one: former IMF Chief Economist Simon Johnson even went so far as to suggest its headquarters should be in Beijing if and when the Chinese become the largest shareholders. Somewhat less far-fetched, China has indeed voiced support for the idea of diversifying its holdings by purchasing sovereign debt of troubled eurozone members (which ares still denominated in euros).

So it is that newswires are abuzz with news that the Chinese are once again making noises to similar effect:

China has promised to take further “concerted action” to support European financial stabilisation, including continuing to buy the bonds of countries at the centre of the sovereign debt crisis, according to senior European officials. The officials, who declined to be named, said Wang Qishan, a Chinese vice-premier, had given assurances that China would step up support for European stabilisation efforts “if necessary”. Mr Wang made the pledge during the third annual China-EU High Level Economic and Trade Dialogue, held in Beijing on Tuesday...

In addition, Klaus Regling, the head of the eurozone’s €440bn ($577bn) bail-out fund, said China had shown enthusiasm for bonds issued by his agency, tasked with raising a sizeable chunk of the funding for the €85bn Irish bail-out. The EU is China’s biggest export market, with two-way trade valued at $434bn in the first 11 months of this year, and Beijing has a strong interest in supporting regional stability. “From the European point of view we appreciate the support of China for the European and international effort to safeguard financial stability in Europe,” said Olli Rehn, European Commissioner for Economic and Monetary Affairs.

Two things, however: so the Chinese have already voiced support for troubled eurozone economies, but that hasn't done much to reduce their interest rate differentials over that of German debt. Also, further support is likely to be tied to the EU moving on two longstanding grievances China holds with the West over lifting its designation as a "non-market economy" earlier than 2016 as agreed to in its WTO accession and limitations to its purchases of European arms:

Mr Wang’s comments boosted the euro’s value against the US dollar, but China’s public support for Greece and Portugal over recent months has not prevented their bond yields remaining near record highs. European officials said that although China had not explicitly linked its bond purchases to any specific issues, Beijing asked in the talks for the EU to grant it “market economy” status and lift a long-standing arms embargo.

That said, I gather that market commentators are taking somewhat increased risk appetite as a result of expectations for China to backstop Europe. Once more, it's interesting how much market participants now attribute to China's actions despite limited evidence of it buying distressed euro-denominated sovereign debt.

Can Count Dracula Save Romania's Economy?

The title is more apropos than you would think. When we last talked about Romania, it was in the clutches of an IMF standby agreement as one of the Soviet satellite countries that ran into a bad balance-of-payments situation in June of 2009. The recently Economist featured a downcast article on Romania's economic prospects going forward. In some respects, it's a matter of "political risk" being an unsettled matter in the country:

Nor are foreign investors queuing up to take advantage of Romania’s fertile soil and beautiful scenery or its flexible, cheap and multilingual workforce. Services are particularly underdeveloped. “This could be the back office of Europe,” says a foreign banker, who tries hard to stay optimistic. It could also be a regional hub for companies interested in smaller neighbouring countries. But investors like certainty, not the murky, jerky decision-making that typifies Romanian politics.

Aside from the difficulties attracting foreign investors due to political shenanigans, there's the matter of promoting tourism. For better or worse, Romania is associated with Vlad Basarab Tepes, also known as Vlad the Impaler or "Count Dracula" as immortalized in fiction. In scenic Snagov Lake lies the island of Snagov, whose monastery contains his grave. Despite his global renown (or notoriety depending on your perspective), this site should be of at least as much historical interest as Lenin's Tomb or the Mausoleum of Mao Zedong. Yet, despite the picturesque location, efforts to make it into a tourist destination have been haphazard at best:

A good example of good intentions but poor results comes from Snagov, an island monastery where the real-life Dracula, a prince called Vlad Tepes, is supposedly buried. With much fanfare, the authorities have built a bridge across the lake, a beauty spot, in the hope of attracting tourists. That is welcome: past governments perversely shunned Romania’s most famous son. The new tourism minister, Elena Udrea (a vivacious and wealthy blonde), wants him to take centre stage. She will lead foreign ambassadors on a “Dracula tour” of his castles in the summer. But for humbler visitors, finding the unsignposted way to Snagov is hard. The ill-built bridge is an eyesore. A rough-spoken monk demands a hefty fee and refers to local gypsies (Roma) as “scum”.

It's not quite a Disneyfied attraction just yet. Call it a regrettable metaphor for lack of progress -

Once I had the rarest rose
That ever deigned to bloom
Cruel winter chilled the bud
And stole my flower too soon