WE ALWAYS BELIEVE THE IMF
Yet another 'leaked report' this time tells us something we have suspected for a long time – not only concerning the IMF's underhand “plausible denial” way of communicating bad news. The story starts with an internal IMF report called 'confidential' which was 'leaked to a Wall St Journal contributor'. This is now standard practice for the IMF, growing rapidly, and easy to trace back to its handling, or mishandling of European bailouts starting with Greece. One example is this report http://online.wsj.com...? where the IMF 'concedes it made mistakes'. Original leakage of this report generated a mini-crisis among EU27 finance ministers, including harsh words from Economics Commissioner Olli Rehn.
The basic cause of dispute is always traceable to two things: the IMF's bad habit of overestimating economic 'recovery', and who pays what for the next or present bailout?
The present leaked report is technical and concerns seemingly-complex fiscal matters, but soon gets to the meat. This time the IMF starts with it's own economists' recognition they made a terrible mistake with their forecasts of the Greek economy 'bouncing back' . They forecast that forced reduction in Greek deficits would lead to 'only' a 5.5% reduction in the size of the Greek economy. But rather soon they were horrified to discover this was a preposterous claim and had to admit that Greek GDP has already suffered – the right word – a contraction of close to 18%.
Ergo, Greece will need more money as its economy contracts further and faster, as its skilled persons and its young people flee the country – told by the government to do so.
MUCH MORE DRAMATIC IMPLICATIONS FOR THE US
Daniel Amerman writing in 'Financialsense' 11 July points out that the latest IMF leak is not only damagingly truthful, or truthfully damaging about Europe's economic meltdown, but is at least as damaging for the USA. In fact more so.
As the IMF report says, not exactly in these words, since late 2008 a substantial chunk of the US economy has become "artificial". Another term we could use is “virtualized”. In brief, as the leaked report says, the USA's private sector basically imploded and has not recovered to this day.
Both IMF and national government statistics have either lied about, or miscalculated the economic impact of “fiscal tightening” or the reduction of government spending – or projected reduction as in the case of the US and most other OECD countries. The merest glance at the absurdly manipulated financial markets of today will show their present all-time highs obviously do not relate to the shrunken, downsized and dysfunctional real economy on which these markets squat. Since 2008, the “damage containment” operated in the US, Europe, Japan and other countries, which propels financial markets to literally uncharted highs, is dependent on running unsustainable government deficits.
None of these governments have the ability to pay down their snowballing debt, under ordinary circumstances. The Catch 22 is they have to pay it back.
As this present 'leaked IMF report' rather clearly says, the constant growth of government control and siphoning of national economic wealth in the USA, exactly as elsewhere, a process that has grown for decades but has exploded since 2008, has created an unrecognizable economy. The IMF's economists used the poetic word “transformed”. More particularly for the US economy, long-gone are the days when the US could lecture to Europeans and Japanese about “bloated government”, pointing out that in 2007 the share of Federal and State government spending in the US was only about 35% of GDP.
Something happened at the height of the financial crisis of 2008. The USA's private economy imploded by $1.3 trillion-per-year according to IMF economists. The crash was so intense it was at least as large as the 1929-31 sequence relative to GDP. However, US government statistics disguise (or lie about) the event to this day. They claim a $300 billion contraction, ironed out by bailouts and QE and nice speeches by Obama, terminating at latest in June 2009.
The accounting trick, or fake statistics – take your pick – was the $1 trillion increase in government spending. Per year.
From the previous 35%/65% split of government/private enterprise activity and spending in GDP, in 2007, the US leapt to a 43%/57% split. According to the IMF that remains the situation since 2009. This makes it obligatory to “re-interpret” the US economy and the claimed post-2009 recovery. This has more than a few implications for what happens next – as the leaked IMF report suggest and hints in its own coded language.
FISCAL FEEDBACK LOOP OR RATCHET
What happened in Greece in fact happened everywhere, from 2008. The only difference was the scale and the speed with which “fiscal feedback” operated, negatively, on the real economy.
The situation is extreme in Greece as a bookshelf of IMF reports, leaked or not, will show. As a direct consequence the so-called “austerity trap” was sure and certain to trigger – although the IMF actually had the gall to pretend this was not sure and certain. Also, Greece already had an oversized and over-fattened government sector, meaning the economic damage associated with reducing government spending - while increasing income and VA taxes - was so great that it could only swallow the enhanced revenues that were expected. The economy could only implode.
The IMF for its own reasons, including ideological, blithely imagined that when all the beneficiaries of government spending, including large numbers of “grey zone” semi-governmental and part-state enterprises and activities lost their income, they would somehow not stop spending and to an extent would go on paying taxes. The economists believed the contraction would be on a roughly one-for-one basis, that a 1% cut in government spending, for a country where say 50% of GDP is government spending, will only cause an 0.5% reduction in total spending. They did not include “multipliers”, that is positive feedback – intensifying the cause of the slowdown.
Overall, as shown dramatically in Greece, reduced employment further shrinks the economy causing more unemployment, less tax payments and bigger government deficits -- a perfect “reverse multiplier” to the claimed Keynesian-type multiplier where increased government spending is manna from heaven. The Greek economy contracted three times faster than the IMF's economists thought it would. Unemployment spiraled. Future growth can only be weak in a long-term crippled economy.
Daniel Amerman is a professional accountant, therefore able to closely analyze, and contradict the basic excuse used by US political deciders since 2008. The excuse is also used by the IMF. It pretends or claims that “before and after” conditions and performance of the economy are symmetrical – or remediable – by reducing government deficits and “restoring the economy” to its previous status. This can be summarized as calling the fiscal multiplier 1, meaning that in the US case, if government spending was reduced as a percentage of GDP to the pre-2008 level, there would only be a proportionate reduction of the size of GDP and a proportionate increase in unemployment rates.
There would not be a “Greek type implosion” due to multipliers. Amerman contests this “benign” or delusionary belief.
He argues that if the United States government were in fact to abandon its "artificial" economy and return to spending only its revenues, mostly from taxes, the much-higher-than-1 real fiscal multiplier would trigger. By his calculations of what would happen, in an event which could be forced on the US, not politically decided because it is “politically impossible”, there could easily be an 8% to 10% contraction of US GDP. Unemployment would at minimum soar to 25%.
UNREAL ECONOMIC FUTURE
The fiscal multiplier under any hypothesis is far above 1. That is, economies of the developed world which have had a sometimes-insidious but always permanent real growth of the government sector as a part of GDP – for decades – will be exposed to “unexpectedly sharp” economic contraction anytime they try to backtrack on government spending. Calling the multiplier a “ratchet” is more accurate because a decrease in government spending will have an unsymmetrical and stronger depressive effect, than the growth effect a same-percentage increase in government spending will have. Putting this yet another way, the economy becomes addicted to government spending – based on borrowing – and cannot adapt to the withdrawal pain, if state spending is cut.
Denying this “inconvenient truth” is the game of the IMF and the political and economic deciders of all the developed countries. This is another reason we are in uncharted waters.
At least as important, as Amerman also says, the coming forced reduction of government spending will truly be The Great Experiment. As we know, there is plenty of talk about reducing government spending – but when it actually happens as in Greece it produces dramatic and scary results. Greece is now truly in 1930s-style Great Depression territory, but uncharted because of the way it was thrown into economic meltdown. We literally do not know what will happen next, because so much of the economy is “virtualized”. We do not know if the “before situation” can be restored.
We can however use real world data from Greece, like the IMF's economists. This data underlines one important, possibly the most important point - that the Greek economy has been “transformed”, to use IMF jargon, but not for the better. For several months now, it is clear that its economy is in a type of void, where the role of government spending, at one and the same time, has to stop and cannot stop.
Amerman says exactly the same would happen to the US, or will happen to the US if it has to cut quickly. Basically, the only difference between Greece and the US is the second country is 30 times bigger. The probable fiscal multiplier-ratchet, in the US, is the same as the Greek one. Brave talk about QE Tapering is almost certainly talk – and not on the menu at all in Europe – because it firstly finances US government debt, long before any other claimed Keynesian miracles also produced by QE. Amerman concludes with a suggestion that the US might “limp through”, without collapse when (or if) government spending is reined in, but above all we are in uncharted waters, because a huge part of the economy is now “virtual”.
By Andrew McKillop
Contact: [email protected]
Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights