Wednesday, October 6, 2010

Count on the IMF to get things wrong

Here's a blurb from the WSJ that summarizes a gloom-and-doom pronouncement from the IMF today:

WASHINGTON—Global growth will slow more sharply than expected in 2011 as advanced economies slash their budgets amid the continuing sovereign debt crisis, the International Monetary Fund said Wednesday.
The downside risks remain elevated in the face of a fragile economic recovery, the IMF said in its World Economic Outlook. "The financial sector is still vulnerable to shocks and growth appears to be slowing as policy stimulus wanes," predominantly in advanced economies, the IMF said. 
"Simultaneously addressing both budgetary and competitiveness problems in a deteriorating external environment is likely to take a heavy toll on growth," the IMF said.
In short, the IMF is saying that efforts to restore fiscal discipline will undermine global growth prospects. Which is funny, because here I have been thinking that it was fiscal profligacy that got us into so much trouble to begin with. How is it that doing the wrong thing—spending way more than you have on non-productive things—can be good for your economy, but doing the right thing—spending within your means and reducing tax burdens—can be bad?

Here's how I would rewrite this:

Global growth will pick up more than expected in 2011, as advanced economies cut back on wasteful "stimulus" spending and the sovereign debt crisis recedes.
Downside risks are likely to decline, as reduced financing demands by major governments will leave more funds available for use by the private sector to create jobs.
Simultaneously addressing competitiveness problems by reducing wasteful government spending and reducing tax burdens will boost global growth prospects. 

4 comments:

Benjamin said...

Nice selection of posts by Scott Grannis, a Hercules among economists for his heavy posting.

I am a little more optimistic of late too, though for different reasons. I think central banks realize the threat to=day is not inflation--our 30 years war is over--but deflation.

It is very hard not to fight the last war, especially for a public agency of any sort. In contrast, private companies must adapt. If Edsel doesn't sell, you stop making Edsels. We can thank our stars for the private sector.

But public agencies can persist in the wrong direction for years and decades. See Bank of Japan.

Can Bernanke change ossified battle formations? I think he is.

I share Scott Grannis' concerns about public spending.
Obviously, "crowding-out" concerns are minimal these days due to huge torrents of capital produced by the global private sector.

I guess public spending is a negative if that money would have indeed been spent by he private sector, and not left in banks.

The big and good news is that important central banks, glacially, are realizing that QE is needed.

We could see a good long bull market here in equities and property. I sure hope os.

Frozen in the North said...

Scott:

(1) There is no crowding out right now, bank lending is dropping (in the U.S. and Europe).

(2) You forget China and its drive for growth, and other EMs

(3) Of course the reduction in stimulus will lead to a reduction in GDP -- not a value judgment just a fact. The IMF has made many comments about the unsustainable level of debt by G7 countries -- its just no one pays attention when they do.

Finally, your assumption is that demand will appear once the Government stimulus recedes is wrong. G7 have gone on a borrowing binge over the past decade. Now its time to pay the piper!

Scott Grannis said...

No crowding out??? Treasury is absorbing almost $1.5 trillion of funds from the private sector this year. That's more than total corporate profits after tax. If that's not crowding out I don't know what is.

Huntington Hartford said...

Your re-write is nice but I think you're dreaming. FWIW, I share the same dream.