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IMF Offers No Solutions, Only Confirms Problems

By Hans Parisis
Tuesday, 12 Oct 2010 02:38 PM Current | Bio | Archive

At the four days of IMF-World Bank meetings that ended on Saturday in Washington DC, IMF Managing Director Dominique Strauss-Kahn (who is, by the way, also likely is Socialist nominee for president of France in 2012) made some very interesting remarks.

In my opinion, the most important was when he was asked about the failure of the IMF to come up with a stronger final statement, he replied: “There is only one obstacle, and that is an agreement of the members.”

He immediately added that the line was a joke. However, he acknowledged: “The language is ineffective … policy has to be adapted. The language is not going to change things ... There is no way to believe that global growth can be rebalanced without changing some currency values ... What we need is real action.”

As always it’s not what is said, but what they’ve done that matters.
For now, the only real action of the big players that can be observed is Washington demanding the Chinese for a substantial revaluation of their currency while Beijing is criticizing Washington over its ultra-loose monetary policy.

PBOC Governor Zhou Xiaochuan said: “The continuation of extremely low interest rates and unconventional monetary policies by major reserve currency issuers have created stark challenges for emerging market countries in the conduct of monetary policy.”

So, with China completely indisposed to any substantial revaluation of its currency and with the Fed more than likely to start a QE2 anytime soon, the big question remains if, how and when they’re going to reconcile.

No doubt, this will remain the dominant enigma/uncertainty and threat to global recovery for a good time to come.

As the IMF still sees well defined serious downside risks to the actual recovery, let’s review them.

The first risk the IMF stipulates is public debt as it expects debt ratio in the advanced economies going up from an average of 75 percent of GDP before the crisis to about 110 percent of GDP by 2014. In the medium term, all countries — especially advanced economies with a high level of debt — should have plans to be announced as soon as possible — and markets have to believe — that governments are committed to go back to a debt ratio which is more sustainable.

Nevertheless, because the recovery is still fragile, all the fiscal room still available has to be used to boost growth.

The second downside risk is a jobless recovery. During the crisis, the global economy lost about 30 million jobs and in the coming decade, 450 million people are going to enter the labor market.

In this context, the IMF managing director said in his opening speech: “We face the risk of a lost generation. When you lose your job, your health is likely to be worse. When you lose your job, the education of your children is likely to be worse. When you lose your job, social stability is likely to be worse — which threatens democracy and even peace. So we shouldn’t fool ourselves. We are not out of the woods yet. And for the man in the street, a recovery without jobs doesn’t mean much. We need to go for sustainable growth, but we also need to go for jobs.”

The third downside risk is still embedded in the financial sector where still a lot remains to be fixed. The world is still in urgent need of a new financial system that is safe enough to prevent a new crisis from being as big, as severe, as the one we just had.

And finally, the fourth downside risk is the vanishing of the commitment to cooperation that worked so very well during this crisis but now is clearly disappearing.

We all see increasingly countries are going back to their domestic problems and paying less attention to international cooperation hereby setting the stage for the next crisis.

Finally I want to quote Mr. Strauss-Kahn: “… if ‘currency war’ is probably too strong a phrase, it’s true that there is this idea that currencies could be used again as a weapon. History has shown that this is not a solution, and that it can even lead to a very bad situation. There is no domestic solution to a global problem.”

So, we finally have the confirmation we face another “mess” in the making.

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HansParisis
At the four days of IMF-World Bank meetings that ended on Saturday in Washington DC, IMF Managing Director Dominique Strauss-Kahn (who is, by the way, also likely is Socialist nominee for president of France in 2012) made some very interesting remarks. In my opinion, the...
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