IMF admits that the West is stuck in near depression

The UK Telegraph:

If you strip away the political correctness, Chapter Three of the IMF’s World Economic Outlook more or less condemns Southern Europe to death by slow suffocation and leaves little doubt that fiscal tightening will trap North Europe, Britain and America in slump for a long time.

By Ambrose Evans-Pritchard
Published: 8:00PM BST 03 Oct 2010

The IMF report – “Will It Hurt? Macroeconomic Effects of Fiscal Consolidation” – implicitly argues that austerity will do more damage than so far admitted.

Normally, tightening of 1pc of GDP in one country leads to a 0.5pc loss of growth after two years. It is another story when half the globe is in trouble and tightening in lockstep. Lost growth would be double if interest rates are already zero, and if everybody cuts spending at once.

“Not all countries can reduce the value of their currency and increase net exports at the same time,” it said. Nobel economist Joe Stiglitz goes further, warning that damn may break altogether in parts of Europe, setting off a “death spiral”.

The Fund said damage also doubles for states that cannot cut rates or devalue – think Spain, Portugal, Ireland, Greece, and Italy, all trapped in EMU at overvalued exchange rates.

“A fall in the value of the currency plays a key role in softening the impact. The result is consistent with standard Mundell-Fleming theory that fiscal multipliers are larger in economies with fixed exchange rate regimes.” Exactly.

Let us avoid the crude claim that spending cuts in a slump are wicked or self-defeating. Britain did exactly that after leaving the Gold Standard in 1931, and the ERM in 1992, both times with success. A liberated Bank of England was able to cut interest rates. Sterling fell. The key point is whether you can offset the budget cuts.

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3 Responses to “IMF admits that the West is stuck in near depression”

  1. Andrea B Says:

    Interestingly pessimistic.

    Ever notice how these articles always leave out countries like Germany, Sweden, Denmark, Poland, Brazil, China, etc, which are all in growth.

    • Suzan Says:

      Your optimism seems Panglossian. Sort of like being on the upper floors of a tall building that is on fire and saying everything is okay because the fire hasn’t affected us yet.

      Free market capitalism as espoused by the Austrian and Chicago schools of economics are based on mistaken concepts and are rotten to the core.

      The economic problems of the GATT, G20, CAFTA, NAFTA, IMF and all the others are systematic.

      Growth is finite. We have hit peak oil. The green revolution that has feed the huge population growth of the last 100 years is crashing into a wall because it is dependant upon oil. There is also not enough fresh water to sustain the present population

      Add in the climate change crisis with its increasing of desertification and the world has hit Malthus’ wall or Ehrlich’s wall.

      The present economic system of constant transfer of the wealth upwards into the hands of a few has created a neo-feudal structure with the bulk of people reduced to poverty or near poverty.

      Collapse isn’t subject to debate although the time table might be. The only question is will the revolts or revolutions be socialist in nature or fascist.

      I personally hope socialism will win.

  2. tinagrrl Says:

    well, this from Wikipedia: “The nominal GDP of Germany contracted in the second and third quarters of 2008, putting the country in a technical recession following a global and European recession cycle.[35] German industrial output dropped to 3.6% in September vis-a-vis August.[36][37] In January 2009 the German government under Angela Merkel approved a €50 billion ($70 billion) economic stimulus plan to protect several sectors from a downturn and a subsequent rise in unemployment rates.[38]

    Germany exited the recession in the second and third quarters of 2009, mostly due to rebounding manufacturing orders and exports – primarily from outside the Euro Zone – and relatively steady consumer demand”

    In other words — they met the recession with good old Keynesian tactics.

    Stimulus for us — austerity for you. The traditional German way — no?

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