Monday, April 18, 2016

IMF Issues New Debt Warning

The IMF has continually had to redo economic forecasts for the global economy to reflect prospects for lower GDP growth than originally predicted. They continue that trend this week with new warnings about sluggish growth and issue a new warning the debt levels are continuing to rise. Below are some quotes from this Bloomberg article on the latest IMF warning.

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"Global policy makers need to guard against a self-reinforcing “spiral” of weakening growth and rising debt that could require a coordinated response by the world’s major economies, according to the IMF’s top fiscal watchdog.

Most countries are on a higher debt path than they were a year ago, the International Monetary Fund said in its semi-annual Fiscal Monitor report released Wednesday. Fiscal deficits in 2015-2016 in emerging economies are projected to exceed levels during the global financial crisis, as countries struggle with low oil prices, cooling investor sentiment and intensifying geopolitical tensions."
. . . . . . . .

"If a low-growth, high-debt spiral takes hold, the responses of individual countries won’t be enough. Major economies will have to quickly act together to combat the “stagnation forces” through measures to spur both demand and supply, said the Washington-based fund, which was created during the World War II to oversee the global monetary system."

“Our evaluation is that risks are at this point in time more considerable than they were, say, six months ago or one year ago,” said Gaspar, a former finance minister in Portugal. “The expression we use for the way we look at global developments at this time is a state of alert. We are on alert, we’re definitely not on alarm.”

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My added comments: This article is in line with comments made by various officials as the IMF Spring Meeting this past week. The theme right now seems to be "we are on alert, we're definitely not on alarm."

It's interesting to watch the IMF and other officials continue to issue warnings but at the same time make sure they say that there is no sign of a crisis for now. Meanwhile alternative media sites continue to suggest that a major crisis is imminent. This week the recent secret meetings at the FED (and at the White House) along with the startup of the new Chinese gold trading platform that will price gold in yuan (instead of US dollars) has prompted all kinds of speculation that something (not good) is going on behind the scenes. In addition we have the Saudi threat to dump US assets if implicated in the 9/11 report and the Fed issuing a letter to JP Morgan saying their stress Plan B is not adequate. The top of page 11 of the Fed letter says that JP Morgan has risks that, "if not overcome, could otherwise undermine successful execution of the preferred strategy and, more broadly, pose serious adverse effects to the financial stability of the United States."

All you have to do is watch to see what happens in the next few weeks to see if there is any validity to the speculation. So far there are no visible signs that a sudden major crisis is about to emerge.

One thing to add. When we use the term "major crisis" here, we are not just talking about a few down days on the stock market or even a recession. We are talking about an event so severe that life as we know is disrupted in some way for a period of time. An event where we see the President address the nation concerning the crisis. An event where major markets are halted and banks are forced to close for some period of time due to extreme stress in the system.

The conditions for a crisis like this are present all the time due to high leverage in the system and the interconnected nature of the so called too big to fail entities. The letter linked above from the US Fed to JP Morgan clearly states that there are risks that could impact the  "financial stability of the United States" within JP Morgan. But so far, no such crisis like this has emerged. It could happen any time or it could not happen for a long time. It's impossible to know ahead of time unless you are inside the system and aware of the stress points in the system. No one inside the system has advised me that such a crisis in brewing behind the scenes, but who knows if they would even if they were aware of one. This new speech by William Dudley (NY Fed) does not suggest any signs of alarm for example. Of course, it's their job not to alarm the public and it's not as if they have not issued a ton of warnings for years now.

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