Friday, March 27, 2009

The IMF's advice to America

I have no idea how good the IMF's advice has been to developing countries historically, certainly Paul Keating didn't think much of Geithner, but it's still worth reading Simon Johnson's account of what the IMF would tell the US if the US needed money from the IMF (which it does not). Market's are up, and things are looking sunnier, but it's hard to disagree with this:
The conventional wisdom among the elite is still that the current slump “cannot be as bad as the Great Depression.” This view is wrong. What we face now could, in fact, be worse than the Great Depression—because the world is now so much more interconnected and because the banking sector is now so big.
We really don't know. And a great deal depends on what politicians decide to do. Japan, again, is instructive:
But the U.S., of course, is the world’s most powerful nation, rich beyond measure, and blessed with the exorbitant privilege of paying its foreign debts in its own currency, which it can print. As a result, it could very well stumble along for years—as Japan did during its lost decade—never summoning the courage to do what it needs to do, and never really recovering.
Japan's been stumbling for 25 years now, trapped in deflation as public debt -- running at about 250% of GDP -- is still not large enough to meet the Japanese demand for savings. Why does the Japanese Government tax at all? It truly boggles the mind. It also does not make me feel better about the US. Johnson again:
“It doesn’t matter how much Hank Paulson gives us, no one is going to lend a nickel until the economy turns.” But there’s the rub: the economy can’t recover until the banks are healthy and willing to lend.
See that -- two sentences back to back, written by someone who claims to be free of the "jedi mind control" the financial industry is able to exert over politicians and academics alike. "No one is going to lend a nickel until the economy turns"... "the economy can't recover until the banks are healthy and willing to lend." If the US Govt stopped draining private spending power through taxes -- not spending anything more, just reducing the fiscal drag it casts every week through FICA, and every April 15th -- the economy would turn. Loans would be paid down. Defaults would fall. Layoffs would taper. Spending would increase. Incomes would increase. Banks would lend. It isn't complicated, but when Simon Johnson cannot see the connection between two sentences, that he wrote, right next to each other, it does not give one much hope.

The banks have made the world believe that the economy needs them to recover. The truth is that banks aren't nearly as important as they think they are. Well capitalized banks cannot help a broader economy trapped in debt deflation. Rising aggregate demand will make whole any bank, regardless of its capital adequacy.


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