Last week's G-8 finance ministers' request for the International Monetary Fund to take the lead in helping countries devise exit strategies today received its first public response from the IMF by the prepared statements of its First Deputy Managing Director John Lipsky.
Lipsky told the Turkish Industrialists' and Businessmen's Association in Bodrum, Turkey: "It is far too early to conclude that the goal of restoring global growth has been accomplished. … In this context, it should be clear that continued strong policy actions will be needed to ensure a turnaround in economic activity during the remainder of this year and 2010. First and foremost, robust growth will not be achieved until continuing financial sector problems are addressed forcefully…"
Fiscal policy, in advanced and many emerging market economies, should remain expansionary, which means among other things keeping key interest rates as low as they are or even still lower and certainly not to start raising taxes at least through 2010 if not till into 2011.
Besides that, the IMF agrees that countries should start preparing themselves to unwind the exceptional measures such as public intervention in the financial sector, and only then when sustainable economic growth is back.
For now, we only can expect a modest global recovery, so that the considerable under-utilization of production capacities will not be eliminated in the next few quarters.
Consequently, unemployment is likely to increase further in the developed countries as a whole.
Investors for now should be much more concerned about the ongoing contraction of household balance sheets than with the rapid expansion of the Fed's balance sheet and the money supply.
They should take notice that the IMF obviously doesn't see nor forecast a short term turnaround for the global economy.
We still have slack in demand, slack in the labor market, and very slow monetary velocity, meaning the number of times per year that money turns over in transactions for goods and services and is normally expressed in nominal GDP/money supply.
In the United States and globally we still see extremely weak economies and persistent deflationary pressures because of too much supply coupled with final demand still contracting. At least for now, we have a problem with deflation.
CPI is now negative in the United States, Europe, China, Thailand, and in a good number of other countries around the world. The fiscal stimuli that are in force everywhere are continuously trying to prevent this already great recession from turning into "Depression II."
No doubt, we're bound to a very tricky and even ugly situation whereby if fiscal policies are tightened too early, any form of recovery will be purely and simply decapitated thereby bringing us to a situation similar to what happened in 1937 or to the Japanese lost decade of the 1990s.
In addition, if fiscal stimulus is taken away too late, we'll have to cope with runaway inflation that could end up in hyperinflation like one à la the Weimar republic in 1923 in Germany, which is, of course, a worse-case scenario.
So, today, everybody is, for good reason, still searching for that miraculous guidance that will help them navigate safely through that mine field.
It is understandable the IMF is asked for guidance, but I don't know if the IMF can do wonders
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