Today, Wednesday, we have our regular musical feature (might surprise today) as well as a brief commentary on the growing friction between the IMF and the World Bank on what governments and central banks should be doing to address the current inflationary pressures. One says hike rates (apparently thinking that will get Russia to withdraw, Covid to go away and OPEC to behave) while the other says provide better income support and wait out this transitory inflationary phase.
IMF continues to lose the plot
The latest – World Economic Outlook (published April 19, 2022) – is another example of why the IMF should be disregarded in all of its utterances.
After traversing through a discussion about the negative impacts of the Ukraine War – slowing global growth and pushing up the inflationary pressures = particularly in “low-income countries” who are more vulnerable to rising food and fuel prices, they conclude that:
… many countries have limited fiscal policy space to cushion the impact of the war on their economies … tighter monetary policy will be appro- priate to check the cycle of higher prices driving up wages and inflation expectations, and wages and inflation expectations driving up prices
So just singing off the standard hymn sheet.
At present nominal wages growth is muted and not driving inflation anywhere.
Medium-term inflationary expectations are also not accelerating.
The IMF is also reasserting the ‘forward-looking’ narrative, which the US Federal Reserve abandoned in August 2020.
I wrote about that in this blog post – US Federal Reserve statement signals a new phase in the paradigm shift in macroeconomics (August 31, 2020).
The Federal Reserve Chairman told an audience at Jackson Hole on August 27, 2020 that the bank would no longer push rates up in advance of actual inflation revealing itself.
Rather it would take backward looking approach to ensure that employment reached the highest levels possible rather than prematurely creating unemployment just in case inflation might appear.
The IMF is trying to push a reversion of that backward-looking approach by claiming:
A well-telegraphed, data- dependent approach to adjusting forward guidance on the monetary stance—including the unwinding of record-high central bank balance sheets and the path for policy rates—is the key to maintaining the credibility of policy frameworks.
The forward-looking approach just elevates unemployment and other forms of labour wastage (underemployment, hidden unemployment) and causes households to default on their precarious debt levels and lose their houses, among other travesties.
The IMF also claim that there were ‘huge … fiscal expansions in many countries during the pandemic’ but what really happened was that the governments were replacing lost spending and income from the non-government sector.
Once we net out the lost non-government spending, the fiscal ‘stimulus’ packages were not very large at all.
The fact that GDP fell so far in many countries tells us that total spending in these economies fell, which means the increase in net government spending did not fully offset the decline in non-government spending.
That puts a different slant on the term ‘stimulus’.
The fiscal interventions were more sandbagging attempts than expansionary impulses to nominal spending.
But the IMF only sees its own flawed framework so:
1. “debt levels are at all-time highs”.
2. “governments are more exposed than ever to higher interest rates.”
3. “need for consolidation”.
So the IMF maintains its irrelevance to any realistic interpretation of what is going on.
The rising debt levels just mean that the non-government sector has chosen to increase the holding of government debt in its overall wealth portfolio.
Rising bond yields just mean (for currency-issuing governments) that they are paying more income to the non-government sector than before, but interest payments are small relative to total expenditure anyway.
Wealth rising, income rising – why is that something to be alarmed about?
If my personal debt was rising and interest rates started moving up then I might be cautious, then worried – depending on the circumstances. If I lost my job, or my discretionary income was squeezed by the rate rises and inflationary pressures, then I might get really worried.
But I don’t transfer those thoughts and deliberations onto the government situation.
I know that the government does not have the financial constraints that I face.
The problem is one I have outlined several times in recent months.
The inflationary pressures are not coming from excessive growth in nominal spending.
Yes, nominal spending is somewhat out of whack with available supply, particularly in the goods sector, but that is because supply is out of whack.
Purging demand through interest rate rises (which will take very significant increases in rates and many insolvencies) doesn’t fix the out of whack supply.
It doesn’t get Russia to behave.
It doesn’t get OPEC to behave.
It just creates more gloom via rising unemployment – adding further woe.
It also seems that the World Bank, the IMF’s co-partner in neoliberalism, has discovered a slightly different hymn sheet.
The World Bank President said recently that central banks should not be relying on interest rate hikes:
The inequality gap has widened materially, with wealth and income concentrating in narrow segments of the global population. Rate hikes, interest rate hikes, if that’s the primary tool, will actually add to the inequality challenge that the world is facing.
So what are they proposing?
Fiscal support for the poor to reduce the impact of fuel and food price rises. In other words, income support to maintain nominal spending in real terms.
Why would they do that if there is inflation?
Because they seem to understand that the inflationary surge is not a demand event and will not be resolved by further cutting nominal incomes.
I will write at more length how governments should handle this tricky period ahead in another blog post soon.
Music – Groovin’
This is what I have been listening to while working this morning.
It is the only album of this band that I have – because (a) I don’t particularly like soft R&B music; and (b) they didn’t record other good songs.
Arethra Franklin’s version is also good by the way.
The Young Rascals grew up quickly and became ‘The Rascals’ and were seen as rivals to – The Righteous Brothers – in the so-called white blue-eyed soul genre.
They eventually broke apart because their keyboard player and vocalist – Felix Cavaliere – wanted the band to release albums with some substance rather than pop singles.
Their attempts at breaking out of the ‘singles’ mould coincided with their experimentation in all things psychedelic and the material than emerged was uninspiring although they demonstrated their social progressiveness with songs such as – People Got to be Free (released 1968) – which offered support for the civil rights struggles in the US.
But at least they left us with this smooth song which always reminds me of sunny days as a teenager in Melbourne walking along the creek as I played truant and explored the world beyond the petty authority of the education system in Victoria.
That is enough for today!
(c) Copyright 2022 William Mitchell. All Rights Reserved.