The International Monetary Fund, born at the Bretton Woods conference in July 1944, turns 80 this week. Officials are worried.
The title of the report recently released by the IMF is World Economic Outlook The title is as follows: The world economy in a sticky spot. According to WEO, the source of the stickiness is services inflation, that is, nominal wage growth, especially in the United States, is outpacing goods price inflation.
Working people haven’t had a real raise for 40 years, adjusted for inflation. Wouldn’t it be nice to see nominal wages rise slightly above the rate of goods price inflation?
Not so for the IMF and its banker friends. From their perspective, services inflation is hampering the ability of central banks like the Federal Reserve to cut rates. They want to lower rates to cushion the blow from all the bad loans that have been created during the coronavirus madness. The Treasury also wants to lower rates to help fund the massive government debt.
Another reason for the IMF’s stickiness is rising trade tensions and what the IMF calls “diminished buffers.” In IMF terms, a diminished buffer is associated with large deficits. The idea is that countries with already large deficits will have fewer resources to increase public spending in the event of a recession or other unexpected shock.
The United States is an example of a country that has been unable to confront its own fiscal recklessness. Last week, IMF chief economist Pierre-Olivier Gourinchas suggested: warning:
“It is concerning that a country like the United States continues to maintain a fiscal stance that poses risks to the domestic and global economy by steadily increasing its debt-to-GDP ratio even at full employment.”
Indeed, high debt, slow growth and growing deficits do not bode well for the future.
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The fiscal stimulus proposed by John Maynard Keynes in the early 20th century was supposed to be countercyclical: deficits were used during recessions to stimulate aggregate demand. Then, during expansions, deficits were reduced and the economy could stand on its own two feet.
The second part of Keynesianism, the deficit-reduction part, has been largely ignored in the United States and around the world. In good times and bad, in feast and famine, deficit spending has been constant. That’s what worries Gourinchas.
But why has deficit spending remained completely out of control in the United States during periods of full employment? Don’t policymakers understand that, according to Keynes, they should be countercyclical?
Remember, deficits are part of the political process. It’s not about sound economic policy. It’s about creating and funding money-making programs that insiders can use for their own personal enrichment.
For the past 50 years, politics has forced deficits. Opportunists have flocked to Arlington, a suburb of Washington, D.C., and Fairfax, Virginia, like bees searching for honey. They are there to make a fortune, while using their intelligence and ingenuity to do fake things at your expense.
The main problem with deficit spending, besides all the fraud and money, is that it is artificial. It is money borrowed from the future and directed to certain areas of the economy by the visible hands of government actors.
When artificiality is expected, conditions adapt accordingly. After 50 years of almost constant deficit spending, the economy has become completely dependent on it.
Dependence
“If you want more, help yourself.” Ronald Reagan said,
During America’s developmental stages, dependence was largely subsidized.
There are free riders who depend on government charity for their daily bread. They build their lives around the support programs. They prefer to live in poverty rather than develop the skills necessary to become self-reliant through their own contributions.
Less visible are the many intelligent, hard-working people who go to work every day to develop businesses that would not exist without government spending. Many of these people work in the private sector, but their income comes from government contracts, laws, or regulations that they have established as services.
Defense. Energy. Education. Health. Finance. Technology. Real estate. Agriculture. Transportation. Aerospace. Insurance. There are few sectors of the economy that are not severely distorted by deficit spending. If you take away the stimulus, they will wither like flowers in the sun.
The rock and the rock that America is stuck in is entirely of its own making. Washington has allowed debt and deficits to run wild, bringing its finances to the brink of disaster.
If interest rates remain high, the net interest on the debt will drain the budget. Eventually, the Treasury will default. However, if interest rates are lowered during a period of persistent inflation, inflation will rise further. This will erode the value of the dollar and destroy personal savings accumulated over a lifetime of work.
For central planners, cutting interest rates is the path of least resistance.
Why radical spending cuts are needed
This week, former New York Federal Reserve President and Bretton Woods Chairman Bill Dudley urged the Fed to cut rates at next week’s FOMC meeting. He said Say Waiting until September unnecessarily increases the risk of a recession.
As Dudley argues, recessions are unpleasant. They are devastating and destructive to families and workers. People lose their jobs and homes. They declare bankruptcy. Some people have to move to other cities or states to find new opportunities.
We don’t like it. Nevertheless, recessions are necessary for a healthy functioning economy. And right now, at this very moment, a recession is exactly what is needed to bring the economy back into balance.
Otherwise, how can the housing market get back to a level where average incomes can afford average housing prices? Otherwise, how can consumer price inflation moderate and stock valuations return to historical averages?
Cutting rates, as Dudley advocates, would not correct the fundamental imbalances in the economy. Nor would it solve Washington’s debt problem. At best, it would buy time for more debt (now approaching $35 trillion) to pile up, risking a bigger collapse. It would also rekindle rampant consumer price inflation.
The only real solution is to radically reduce spending. Eliminate the deficit. Balance the budget, but also run a surplus and pay down the debt.
This solution has a deep recession built into it. The drastic spending cuts will wipe out the livelihoods of many people. The era of dependency will end quickly.
But in the long run, we will all be better off. America will adapt, and the American people will achieve greater independence as they walk the path of happy and unhappy destiny.
Unfortunately, the political establishment won’t allow it. Not in a meaningful way. They love the fruits of big government so much that nothing can stop it.
The result will be debt, deficits, inflation and chaos.
[Editor’s note: It really is amazing how just a few simple contrary decisions can lead to life-changing wealth. And right now, at this very moment, I’m preparing to make a contrary decision once again. >> And I’d like to show you how you can too.]
thank you,
MN Gordon
For Economic Prism
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