Saturday, February 8, 2014

So What Does the IMF Want to Do?

One thing I have observed over the years following the topic of monetary system change is that there are very different world views out there that don't really agree on much of anything. The IMF represents the existing power structure. It is viewed with admiration by people who tend to reside on the left side of the political spectrum (although Bitcoin may be changing this for some younger people). Those further to the right would view it with skepticism at best. They don't view centralized power structures as a good idea in general.

But no matter where we are on the spectrum one thing is clear. The IMF is a key player in the system. They do wield power and influence even while at times they may appear like a room full of cats with 188 member nations who are not going to agree on a lot things. 

Here we are not going to take sides. Our mission is to try and present information with as little bias as possible. So we will give space here to IMF views and those who don't like things like the IMF. It's not that we don't have opinions. It's just that facts are more important than opinions in terms of what is more likely to actually happen (when you are trying to plan for the future).

She talks about needing growth for jobs and lists 3 priorities from her point of view. You can read the article and form your own opinion. Clearly overall she comes from the point of view that governments and global institutions have a key role to play. Critics will surely say governments and global institutions do more harm than good regardless of their intentions.

But I will note a few quotes and make a few brief comments on how people from different views might react. The quotes will be in black type and my comments in blue.

"Two trends are particularly troubling, now and for the future. First, the high level of long-term unemployment gives me great cause for concern: almost half of those without a job have been unemployed for more than a year. Second, I still worry about the large number of young people without jobs: nearly one quarter of Europeans under the age of 25 who are looking for a job cannot find one."

my comment: this is just a statement of facts, no reason for anyone on the spectrum to disagree here (except some in the media who seem to think we are having a wonderful global recovery).

Now her 3 priorities on how to fix this problem.

"For the euro area, I believe that enhancing the institutional framework of the monetary union is urgent. Putting in place all of the elements of a banking union would be an excellent place to start. This would ensure the continued stability of the financial sector and address spillover effects from potential instability. The capacity to undertake a timely, effective, and least cost resolution of ailing banks with a common backstop will help break the adverse link between banks and sovereigns, where government support for a weak banking sector calls into question the sustainability of public debt, which feeds back into concerns about the strength of the banking sector, which typically has large holdings of government debt. It will also go a long way toward reducing the uncertainty of investors."

my comment: IMF supporters would have no problem with this, critics will be skeptical of concentrating more power and see this as making things worse and not better

"As a second priority, households, corporates, and ultimately also the public sector need to reduce high debt levels. A lasting pick-up in growth will remain out of reach until the balance sheet legacies of the crisis are addressed. Given the slow pace of global demand growth, there is—unfortunately—little hope that these sectors will simply grow out of their debt problems. This means they face increased pressure to deleverage, to actively reduce their debt through higher savings, which threatens the recovery.
IMF analysis indicates that high levels of private sector debt may be particularly problematic and should therefore be addressed first. Private sector deleveraging today can support self-sustained growth later on. Depending on country circumstances, policymakers might be able to do this by putting in place or reinforcing appropriate microstructures, such as effective insolvency frameworks—featuring, for example, fast and flexible personal and corporate bankruptcy proceedings—to help avoid lengthy periods of deleveraging and to protect growth.
Government debt also has to come down. In a lower-growth environment, the trick is to move gradually as long as markets allow, with policies anchored by a durable commitment to sustain fiscal consolidation at a steady but reasonable pace over the medium-term. In addition, consolidation should be seen as an opportunity to make budgets more growth friendly, for example, by shifting from direct to indirect taxation."

my comment: here she makes some comments that both sides may like. A tea party supporter likes the idea of government debt coming down and the use of bankruptcy to resolve debts (instead of taxpayer bailouts). But they will not like the idea that "private debt levels be addressed first" and whatever "shifting from direct to indirect taxation" might mean.  It is interesting to note that she concedes here that growth is not going to be good enough to "grow out of their debt problems". This is what those warning of a major monetary system reset say. They can't really fix it now, so at some point they will "reset" it.  Ms. Lagarde clearly hopes they can hold things together long enough to allow for a steady recovery over time, but admits it is tricky to do so. We agree it will be tricky.

"Turning to the third priority, product and labor market reforms can make a significant contribution to realizing a country’s full growth potential. Being nimble and competitive opens up new opportunities in a world where production processes increasingly span more than one country. The Czech Republic and the Republic of Slovakia—which established themselves as important intermediate producers for the German automobile industry—are good examples of how integrating into a supply chain can, over time, enhance domestic value added and growth. Importantly, structural reforms tend to have the greatest impact when they are undertaken in a way that is comprehensive instead of piecemeal. I am well aware, of course, that reform priorities and design will vary widely across countries. For example, reducing structural rigidities in the German services sector—including via a review and harmonization of entry requirements in professional services—can help boost productivity there and spur domestic demand. Meanwhile, in Spain, recent labor market reforms show signs of success."

my comment: again a tea party supporter would like "being nimble and competitive opens up new opportunities". They would have concerns about what "structural reforms" that need to be done "in a way that is comprehensive" might mean. 

"The road ahead is certainly challenging, and different views exist on what policymakers should do—kick-starting and sustaining growth is a complex challenge that requires action on many fronts. It is a debate that engages us all because it affects us all—every citizen, in Europe and beyond."

my comment: I'll go out on a limb here and say I fully agree with the last statement. It's why I have this blog:)

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