BackThe IMF endorses snake oil
The International Monetary Fund has a long way to go before it is recognized as a competent and honest adviser who is unafraid to speak the truth to power
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The International Monetary Fund (IMF) had prepared a 17-page note for the G-20 meeting in Chengdu, China. This is what the Fund had to say about BRIC countries (Brazil, Russia, India, China). For the most part, the content was troubling.
On China, the Fund had noted that the country had again resorted to infrastructure spending and credit binge. The operative word was ‘again’. Many others have noted the boost to public investment while private investment in China has decelerated sharply. They do not care what the world thinks. They will do whatever it takes to keep up the pretence of growth and rebalancing can wait, eternally.
On India, the Fund noted the decelerating pace of reforms and the headwinds posed by stressed corporate and bank balance sheets to economic growth. These are fair points. Contrary to what many hope, there is a still a long way to go before light appears at the end of the banking tunnel for India.
On Brazil and Russia, the Fund notes that growth has bottomed out long ago. That is good news. The asset markets in these two countries are more attractive than they are in China or in India.
On monetary policy, what the Fund wrote was most disappointing.
“Monetary policy: Central banks should continue to use all available instruments to raise inflation, including negative interest rates (emphasis mine), where appropriate, while carefully monitoring the potential impact on banks, pension funds and insurance companies as well as market functioning. There is a clear case for the Federal Reserve to proceed along a very gradual upward path for the Fed funds rate…"
The open encouragement of negative interest rates is astounding. There is nothing much to show for them in terms of real economic outcomes—they are not nearly commensurate enough whereas the distortions they cause are plenty. A recent Bloomberg article on the difficulties that CALPERS pension fund faces in generating returns on its investments commensurate with its pension obligations is just the tip of the iceberg. In addition, when it presented its Economic Outlook in June, the Organisation for Economic Co-operation and Development (OECD) noted that retirement savings fetched 40% less income in 2015 than they did in 2010. They would have declined further now.
Further, there is no mention of the distortions (and price bubbles) that the monetary policy stance is creating in stock and debt markets. By some measures such as the price/revenue multiple of the median stock, US stocks are on their way to becoming the worst bubble in history. Companies are boosting share prices through buybacks and the economic expansion is ageing. As professor Edward Lazear noted in a recent opinion piece, the Federal Reserve has passed up the opportunity to raise interest rates at the appropriate time. Now, it is damned if it does and damned if it does not. Instead of acknowledging the dangers that the policy stance has created and further risks that a persistence with the status quo entails with utterly destabilizing consequences for the real economy afterward, the Fund is encouraging doubling down on the snake oil economics of central banks.
The Fund has also advocated growth-friendly fiscal policies for advanced economies. This renewed emphasis on fiscal policy tends to ignore the long-run balance sheet effect. Accumulated government debt is high and so are unfunded obligations on pensions and social security. Further, this is also likely a hint of the shape of things to come—monetary policy-supported fiscal stimulus. We have to wait and see what the Bank of Japan does in its 28-29 July meeting.
My hunch is that some new measures would be unveiled in that meeting. Not for nothing did Ben Bernanke visit Tokyo recently. China has used the Brexit as an excuse to weaken its currency. So, I think the US has given its green signal to Japan to do its part with currency debasement. Down the slippery slope they go.
It is not surprising that the Chinese yuan’s ranking in international payments has slipped to the sixth position with the Canadian dollar beating it to the fifth position. The yuan is well on its way to becoming a global funding currency and stay that way for a very long time, as the yen had been for a long time.
Despite much acknowledgement of the need for including financial market feedback loop into macro policy framework, in the final analysis, when it comes to actual policy advice, such acknowledgements stand exposed as mere tokenisms. What the Fund’s memo to G-20 tells us is that, when needed, official multilateral institutions pull back from warning the world of the dangers of asset bubbles that are massively divorced from the prevailing and persistent macroeconomic malaise. It is hard to imagine that they would be administering these warnings in private because their public postures betray no intellectual understanding or grasp of the dangers. Maybe their incentives and interests are not aligned with the recognition of dangers of the asset bubble. Whatever the underlying logic, the Fund has a long way to go before it is recognized as a credible, competent and honest adviser who is not afraid to speak the truth to power.
V. Anantha Nageswaran is an independent financial markets consultant based in Singapore.
Comments are welcome at baretalk@livemint.com. Read V. Anantha Nageswaran’s previous columns at www.livemint.com/baretalk
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