Sunday, June 12, 2016

IMF Chief Economist Clarifies IMF Position in Interview

Recently the IMF released a new study that appeared to suggested the "neoliberal" policies employed in recent years had the impact of increasing inequality and had not fully worked as intended. Here is an excerpt from that report:

"Instead of delivering growth, some neoliberal policies have increased inequality, in turn jeopardizing durable expansion"

Apparently, there was some concern at the IMF that this report was misinterpreted in the financial media, so IMF Chief Economist Maury Obstfeld did a followup interview posted on the IMF web site to clarify things. Below are some excerpts from the interview which you can read here.

IMF Survey: The Fund has made clear in recent years its willingness to examine its macroeconomic thinking and policy approaches. Some have called this revolutionary—is this the case?
Obstfeld: I would describe the process as evolution, not revolution. The Fund has long tried to build on its experiences in the field and on new research to improve its effectiveness in economic surveillance, technical assistance, and crisis response.
It’s fair to say that the shock of the global financial crisis led to a broad rethink of macroeconomic and financial policy in the global academic and policy community. The Fund has been part of that, but, given the impacts of our decisions on member countries and the global economic system, we view it as especially important for us constantly to re-evaluate our thinking in light of new evidence.
That process has not fundamentally changed the core of our approach, which is based on open and competitive markets, robust macro policy frameworks, financial stability, and strong institutions. But it has added important insights about how best to achieve those results in a sustainable way.
IMF Survey: Do you agree with some who have argued that a recent article in F&D (“Neoliberalism: Oversold?”) signifies a major change in Fund thinking? For example, is the IMF now saying that austerity does not work and, indeed, that it exacerbates inequality?
Obstfeld:     That article has been widely misinterpreted—it does not signify a major change in the Fund's approach.
I think it is misleading to frame the question as the Fund being for or against austerity. Nobody wants needless austerity. We are in favor of fiscal policies that support growth and equity over the long term. What those policies will be can differ from country to country and from situation to situation.
Governments simply have to live within their means on a long-term basis, or face some form of debt default, which normally is quite costly for citizens, and especially the poorest. This is a fact, not an ideological position.
Our job is to advise how governments can best manage their fiscal policies so as to avoid bad outcomes. Sometimes, this requires us to recognize situations in which excessive budget cutting can be counterproductive to growth, equity, and even fiscal sustainability goals.

note: I added the underline and bold features in the answer above for emphasis


My added comments: In the interview Mr. Obstfeld goes on to say what we instinctively know. He says that obviously governments need to contain their debt to sustainable levels so that "the public debt can be repaid without very high inflation". He adds that some countries do not contain their debt properly. He goes on to say that at some point the problem reaches a point where the debt cannot be repaid. At that point the IMF then will recommend "debt re-profiling or debt reduction" (as they do now for Greece). This solution "requires creditors to be a part of the cost of adjustment."

Here are some observations we can make from this interview:

despite the fact that we all know debt needs to be contained at a sustainable level, countries abuse debt anyway which leads to loss of public trust over time

- debt does matter eventually - Mr. Obstfeld says "governments have to live within their means on a long term basis, or face some form of debt default"

- we can expect that at some point when debt becomes unsustainable it will be "re-profiled or reduced". This process will involve creditors (people who hold the debt) taking a hit on government debt they presumed was safe to own

- how Greece is resolved may well set a model or precedent for how future unsustainable debt situations are handled so we should see watch to see how that turns out

The choice of words used by Mr. Obstfeld is interesting to me. He says governments that do not live within their means have to "face some form of debt default". This suggests there are multiple forms of debt default. I would guess this might include restructuring debt so that the term of the debt is vastly extended (40 or 50 years for example), direct write off of a portion of the debt, or devaluation of the currency of the debt to pay it off using currency with a much lower value in the future. 

That last option is not one you are likely to hear mentioned officially, but does happen. In fact, some believe it is the preferred method of some governments because it may be the least noticeable to the public. It makes it appear that the nominal value of the debt was paid off even while the purchasing power of the currency involved takes a big hit in the process. Some believe that the US dollar will eventually suffer this fate if the US does not contain its debt over time to sustainable levels.

Added note: In this recent interview, securities lawyer Dimitri Lascaris says that he thinks there is some "incoherence" within the IMF (see quote below). He also implies that the recent research paper (noted above) that asks if Neoliberalism was Oversold may have been released without the full knowledge of IMF Managing Director Christine Lagarde. That's hard to imagine, but this article may be of interest to readers so I posted the link to it. Here is quote from Mr. Lascaris from the interview:

"And so even as the IMF research staff, I mean, this is a most remarkable situation, is acknowledging for the first time the failures of neoliberalism, and that it doesn’t achieve its own goals, it continues to insist, the management of the IMF, the leadership of the IMF continues to insist that countries like Greece engage in extraordinarily rapid and extreme deregulation, and extraordinarily severe austerity. All of this just paints a picture of complete incoherence within the IMF itself."

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