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Imf's Mad Prescription For The Us Economy

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http://blogs.telegraph.co.uk/finance/jeremywarner/100007079/imfs-mad-prescription-for-the-us-economy/

Wrong, wrong, wrong. In a downbeat assessment of the US economy published today, the International Monetary Fund said there was “scope for a smaller up-front fiscal adjustment if downside risks materialise”. What directors are saying is that the US can afford to go slow on fiscal consolidation if the economy begins to weaken again. This is essentially the same debate as we are having here in the UK about how quickly to cut the deficit. Does it make sense to cut if the economy is weakening?

As far as the US is concerned, the IMF seems to agree that it doesn’t and has therefore given international blessing to what the Obama administration seems determined, assuming Congress allows, to do anyway – a second fiscal stimulus, or at least a postponement of vague commitments to start squeezing from next year onwards.

Now I’m not saying that the US economy doesn’t need further stimulus. Perhaps it does. Ignore today’s second quarter GDP figures. Growth was much slower than the first quarter at 2.4 per cent, but there were some encouraging signs within the numbers. Investment was well up, and to everyone’s surprise, there was apparently a big surge in new home construction.

Yet these are backward looking numbers which tell us nothing about the future. Many of the lead indicators have started to flash red over the past few weeks. Such as it is, the recovery is still highly dependent on public policy support. To withdraw it too soon risks plunging the economy back into recession. On the other hand, there is now mounting evidence that far from being the solution, the deficit is becoming a major part of the problem. As the IMF itself admits, “setting public debt back on a sustainable path remains a key macro-economic challenge”. I would put it more strongly. It is in fact the key economic challenge.

The IMF has to be careful what it says about the US, its biggest shareholder, so there is the customary “welcome” for the administration’s commitment to fiscal stabilisation. What fiscal stabilisation? US plans for deficit reduction are vague, and to the extent that they seem to rely substantially on growth to do the donkey work, wholly unconvincing. Frankly, the US commitment to fiscal consolidation doesn’t add up to a hill of beans. America risks putting itself in considerable and largely unnecessary long term peril by continuing to borrow on such a scale.

Money and credit are again shrinking fast in the US. The solution is not further fiscal stimulus, which thus far seems to have profited Chinese exports far more than American jobs, but for the US Federal Reserve once more to turn on the printing presses through a renewed programme of purchases of Treasury securities – in other words, more quantitative easing.

The last Fed minutes have already raised this possibility, and yesterday there was public support for it from James Bullard, president of the St Louis Federal Reserve Bank and a member of the Fed’s rate setting “Open Markets Committee”. Bullard said the central bank should be ready to shift its focus to more aggressively pumping credit into the financial system if the recovery appears at risk. “On balance, the U.S. quantitative easing program offers the best tool to avoid such an outcome,” he said, adding that his preferred route to provide additional easing would be through buying more long-term Treasury securities.

Just as interesting for anoraks of the deeper mysteries of monetary policy, in a speech apocalyptically entitled “Seven Faces of The Peril”, Bullard says that the Open Market Committee’s continued use of “extended period” language was increasing the risks of a Japanese style deflation. The Fed has for long now said that it intends to keep rates low for an “extended period”, but in Bullard’s view this might actually have started to do more harm than good, for it tends to lend support to the idea that the Fed expects things to be bad for a long time, and therefore further damages confidence. A permanently low nominal interest rate environment, a la Japan, would become embedded in popular psychology.

Yet another argument for printy printy.

We have had a credit boom, the party is over consumption levels over the past couple of decades cannot be maintained, the more you try to sustain the unsustainable the bigger the collapse will be.

Ludwig von Mises describes the endgame brought on by reckless expansion of credit: "There is no means of avoiding the final collapse of a boom brought about by credit (debt) expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit (debt) expansion, or later as a final and total catastrophe of the currency system involved."

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http://blogs.telegra...the-us-economy/

Yet another argument for printy printy.

We have had a credit boom, the party is over consumption levels over the past couple of decades cannot be maintained, the more you try to sustain the unsustainable the bigger the collapse will be.

Ludwig von Mises describes the endgame brought on by reckless expansion of credit: "There is no means of avoiding the final collapse of a boom brought about by credit (debt) expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit (debt) expansion, or later as a final and total catastrophe of the currency system involved."

Hey! You stole my sig of 3 years. wink.gif

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  • 259 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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