Posts Tagged ‘imf’


China is being accused of starting a new currency war. The People’s Bank of China has devalued the Chinese currency three times in three days. Politicians on Capitol Hill can barely conceal their ire. There is even talk that both the Fed and Bank of England will hike interest rates as a result. Yet for all that, it may simply be that China is doing what both the IMF and Washington have been calling for it to do for years.

China wants its currency, the yuan, or the renminbi, to be part of the basket of currencies that make-up the IMF’s Special Drawing Rights, or SDR.  For this to happen, the IMF says that the yuan must be allowed to trade freely on the open markets. China say that this is precisely what it is doing.

There was a time when China manipulated its currency, keeping its value artificially low. To achieve this, the government went out and bought western bonds, especially US government bonds. This in turn pushed up on the value of those bonds, causing their yields to fall. It’s an important point that often gets overlooked. Some criticise the Fed’s polices over the years, but truth be told in the long term, it is not central banks which determine interest rates, but movements of money which in turn can be changed by deep forces at play.  China’s policy of maintaining a cheap currency was a major factor in creating low interest rates for much of this century. And while the cheap yuan theoretically led to lower US exports, US borrowing was partly funded by China, and at exceptionally low interest rates.

It is just that the yuan is no longer cheap.  It hasn’t been for some time. If the yuan really was allowed to trade freely, it would surely fall in value. Washington can scream with fury, but China is gradually moving towards a position that the US has wanted it to occupy for years.

After the first devaluation, the IMF said “The new mechanism for determining the central parity of the Renminbi announced by the PBC appears a welcome step as it should allow market forces to have a greater role in determining the exchange rate. The exact impact will depend on how the new mechanism is implemented in practice. Greater exchange rate flexibility is important for China as it strives to give market-forces a decisive role in the economy and is rapidly integrating into global financial markets. We believe that China can, and should, aim to achieve an effectively floating exchange rate system within two to three years. Regarding the ongoing review of the IMF’s SDR basket, the announced change has no direct implications for the criteria used in determining the composition of the basket. Nevertheless, a more market-determined exchange rate would facilitate SDR operations in case the Renminbi were included in the currency basket going forward.”

Some say the timing is cynical, because China has devalued in the same week that saw weak data on industrial production investment and retail sales. That may be right, but so what. China is simply doing what the IMF has recommended, but chosen the most fortuitous moment. What’s wrong with that?


The IMF is a critic. It reckons the US has hit the brakes too fast, and wants to see more stimulus measures. As for the UK, it wants to see more short term borrowing to fund investment into infrastructure. The Bank of International Settlements (BIS), often called the world’s central bank, is a critic too, but for almost the opposite reasons.

Time to stop doing whatever it takes.

In a report out today, the BIS began by referring to Mario Draghi’s famous words when he said: “We will do whatever it takes to save the euro.” The BIS said: “But we are past the height of the crisis, and the goal of policy today is to return to strong and sustainable growth. Authorities need to hasten structural reforms so that economic resources can more easily be used in the most productive manner. Households and firms have to complete the repair of their balance sheets.

Governments must redouble their efforts to ensure the sustainability of their finances. And regulators have to adapt the rules to an increasingly interconnected and complex financial system and ensure that banks set aside sufficient capital to match the associated risks. Only forceful efforts at such repair and reform can return economies to strong and sustainable real growth.”

This is pure austerity economics, right out of the Austrian school of economics.

Then the BIS laid into what are often called the zombies.

It said: “Productivity gains and employment in the major advanced economies have sagged in recent years, especially where pre-crisis growth was severely unbalanced. Before they can return to sustainable growth, these countries will need to reallocate labour and capital across sectors. Structural rigidities that hamper this process are likely to hold back the economy’s productive potential. Both productivity and employment tend to be weaker in economies with rigid product markets than in ones with more flexible ones.

Similarly, employment rates tend to be lower where labour markets are more rigid.Conversely, countries with flexible labour markets recover more quickly from severely imbalanced downturns. They also create more jobs. Reforms that enhance the flexibility of labour and product markets could be swiftly rewarded with improved growth and employment.”

So what is it really saying?

Firstly, that QE has run its course, and monetary policy needs to return to normal. Secondly, that we need to see more creative destruction; let businesses fail, because the vacuum that is created can be filled by more efficient firms, and productivity will start to improve.

But is that really right? The BIS might be saying that QE has done its job, and now it is time to go back to normal, but frankly it never was a fan of QE in the first place. It may say that now is the time for governments to pay back debts, but then it also said that last year and the year before.

It is suggesting that as the economy changes, now is the time to implement the changes that it wanted to see implemented even before the economy had changed.

Do we really need to see create destruction? Take one sector, as an example, the UK High Street. This has seen rather a lot of destruction to date, precious little creativity has followed.

Then again, the recovery does appear to be starting in the US, and say one thing for the US, it does have an extraordinary ability to reinvent itself.

Being a cynic is fun. It is a good laugh, finding the flaws in any hint of optimism. And many have had a ball of a time laughing at the argument that it is good news on the US economy that lies behind the Fed announcing plans to ease back on QE.

But actually, there really has been good news coming out of the US of late. And with signs that US manufacturing is finding new opportunities, even that 3D printing may create new jobs, we could even be at the early stages of seeing something of a reversal of what we have seen in recent years of the trend of growing inequality.

The BIS might be right to say we are approaching the time when the US needs to see monetary policy return to normal – but that is happening anyway.

But the euro needs is own version of QE, proper QE that is, not Draghi playing with words. Japan’s experiment in Abeonomics needs to be given more time, and QE needs to be used more imaginatively to directly fund investment in the UK.

History tells us, that monetary policy has often been reversed too soon while an economy recovered from a depression recession/depression. Right now, there is a real danger that monetary policy will be tightened too soon. And the BIS seems to be oblivious to this risk.

© Investment & Business News 2013

Here are two technical terms, before we get underway: fiscal multiplier and blinkered. A fiscal multiplier simply describes the relationship between government spending and GDP. Blinkered, which was a theory developed by Professor Obvious from the school of common sense, may apply George Osborne.

Here is some simple maths. Let’s say that for every pound the government spends on welfare and department spending, the economy grows by 60p. Let’s say that for every pound spent on infrastructure, the economy expands by one pound. Professor Obvious might suggest the following: spend less on welfare and departmental spending, and use the money saved to boost spending on infrastructure.

If you want to take a view from the ‘School of the Not Quite so Bleeding Obvious’ (SNQBO), then things change. What is true now may not be true tomorrow, next week or in, say, ten years’ time.

It does, however, feel as though the equations described above are roughly right at the moment.

Yesterday the IMF said: “The United Kingdom could boost growth by bringing forward measures already included in its fiscal plan, such as spending on infrastructure and job skills.”

Capital Economics reckons that if the government was to spend £10 billion in this way, it could cancel out the GDP dampening effect of its planned £6 billion cut on welfare and department spending for 2013.

The other benefit of investment into infrastructure, and indeed job skills, is that it can lead to improved productivity, precisely the area where the UK is so weak.

Furthermore, by taking money scheduled for expenditure at a later date, Mr Osborne could implement the IMF recommendations without worsening the UK’s public debt in the long run.

So why not do it?

One reason might be, and excuse the introduction of another technical term, the slippery slope. Osborne may fear that short term one-off initiatives have a habit of becoming entrenched. That is to say that theory might suggest we just need to take the money from planned future expenditure, but when we get to that future date, the government may find that it is still under pressure to spend that money.

The other reason is that Mr Osborne, to use the jargon, is blinkered.

© Investment & Business News 2013

The IMF has now released its latest outlook for the global economy. So who are the latest winners and losers?

Well, let’s start with the world’s biggest economies.

It won’t surprise you to learn that China is still top of the pecking order. The IMF forecasts growth of 8.0 per cent this year followed by 8.2 per cent next.

India is expected to stage something of a recovery, from 4.0 per cent growth in 2012, to 5.7 per cent next year and then 6.2 per cent.

In South America, Brazil too is expected to enjoy a recovery, with growth increasing from 0.9 per cent in 2012 to 3.0 per cent this year. Mexico is expected to outperform Brazil this year, and next, however.

Russia is predicted to chug along with growth between 3 and 4 per cent, as was the case last year.

As for the world’s largest developed economies, it’s kind of going with size. The fastest growth rate is expected to apply to the US, expanding by 1.9 per cent this year and by 3.0 per cent next. Then we have Japan (1.6, then 1.4 per cent) and then Germany (0.6 followed by 1.5 per cent.)

The UK is expected to see a marginally better performance than Germany – 0.7 then 1.5 per cent, while France is expected to contract this year by 0.1 per cent before growing by 0.9 per cent next year.

Incidentally, the IMF is still sticking to the line that next year will be better. It always does seem to say that these days. It said it in 2008, 2009, 2010, 2011 and 2012. No doubt, this time next year, after revising its forecasts for 2014 downwards, it will predict an improvement in 2014.

Drill down and Europe’s star performer in the growth league in 2013 is expected to be Latvia, followed by Turkey, then Estonia and Lithuania. The worst performer is expected to be Greece, then Portugal, followed by Slovenia, Spain and then Italy.

Ireland is expected to grow by 1.1 per cent this year and by 2.2 per cent next. Iceland is expected to do slightly better this year and slightly worse than Ireland next year.

In Asia, Indonesia is expected be in second place behind China, followed by the Philippines, and then Thailand, India, and Vietnam.

In the Americas, Paraguay is expected to lead the way – in fact it is expected to have the fastest growth rate in the world (11.0 per cent). Chile, Bolivia and Ecuador are in second, third and fourth spots respectively; all are expected to grow at between 4 and 5 per cent. Venezuela is expected in last place.

In the Middle East and North Africa, Iraq is expected to be the fastest growing economy this year followed by Maghreb, then Qatar. Iran is expected to see contraction.

In Asia, Turkmenistan is expected to top the list followed by Kyrgyz Republic and then both Uzbekistan and Tajikistan.

In Sub-Saharan Africa the order from the top is expected to be Sierra Leone, Swaziland, the Gambia, Mozambique and the Ivory Coast. Both Sierra Leone and Swaziland have been subjected to massive swings with huge contractions last year, and anticipated huge growth this year.

©2013 Investment and Business News.

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It was told elsewhere how the single most important piece of academic research underpinning austerity has come under attack. See: Austerity economics in disarray. Now the IMF has put the boot into the Austerians.

At the press conference held by the IMF as it revealed its latest economic outlook report, its chief economist Oliver Blanchard said of the UK: “In the face of very weak private demand, it may be time to consider adjusting the original fiscal consolidation plan.”

The IMF report itself when looking at the UK said: “Domestic rebalancing from the public to the private sector is being held back by deleveraging, tight credit conditions, and economic uncertainty, while declining productivity growth and high unit labour costs are holding back much needed external rebalancing.”

Let’s just remind ourselves of the arguments on both sides.

Against austerity: GDP is made of consumption, investment, exports minus imports and government spending. Across the global economy exports must equal imports. For the world, only consumption, investment and government spending make up GDP. If consumption and investment fall, government spending must rise in order to achieve growth.

For austerity: The economy is like a fixed cake. If the government spends more, investment and consumption must fall. In short, a rise in government spending causes consumption and investment to fall. Households see government debt rise, and immediately assume taxes will rise, and save more and spend less to save for higher taxes. Companies follow much the same logic.

Against austerity: But countries such as Spain had modest government debt just at the point when the economy crashed. Poor economic growth causes government debt to rise.

For austerity: Government debt is immoral. It means we are passing on debts to our children and generations to come.

Against austerity: But austerity can cause unemployment amongst the young, and may permanently result in the deterioration of the career prospects for those who should be entering the workforce for the first time.

For austerity: Creative destruction frees up space into which new companies can grow.

For austerity: Debts have to be reined in.

Against austerity: Implement creative destruction when the economy is growing. Because austerity leads to lower growth, it can cause debt to GDP to rise. For austerity: Carmen Reinhart and Ken Rogoff’s book: ‘This time it is different’ makes it clear. When government debt rises over 90 per cent of GDP, growth falls.

Against austerity: A new paper has thrown a huge question mark over the validity of Reinhart and Rogoff’s findings. See: Austerity economics in disarray.

©2013 Investment and Business News.

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The IMF and the French government disagree. The IMF has downgraded its previously estimated forecast for the French economy to grow by 0.3 per cent in 2013, to a 0.1 per cent contraction. The French government predicts a growth rate of 0.1 per cent in 2013. The difference between the two sets of projections is not great, but psychologically speaking there is a huge gulf between modest growth and a slight contraction. Alas, the IMF may be understating the reality.

It really boils down to culture. There is the Anglo Saxon way and the French way. In the UK, the favourite pastime of many Brits is called “let’s knock our country.” Let’s find reasons why we are… how can one put it nicely?… crap. So that’s our cars, our factories, our, well… our everything. The French have one thing in common with the Brits, and that is that they too find it easy to think of things wrong with Britain. Rarely, however, do you hear the French talking down France.

This is not meant to be a criticism of either set of cultural attitudes. It is just the way it is.

When it comes to economics, however, it is not like that. Anglo Saxon economists look at the restrictive labour laws in France, the wall of protectionism it erects – it is a kind of latter-day Maginot line of business – at its inefficient and highly protected auto makers, at French taxes, at the low retirement age at a time of an ageing population, and scratch their heads. It is a miracle, say these economists, that France didn’t fall into recession years ago, and then stay there.

French economists, on the other hand, look at the UK, at its nonsensically low minimum wage at a time when wages are falling, at the lack of maximum working hours and the high level of our retirement age at a time when unemployment is high, at the way in which Brits sit back and allow foreign companies to buy out our famous brands and businesses, at our lack of manufacturing, and scratch their heads. They say the only reason why the UK didn’t fall into recession years ago, and stay there, was because of that hugely damaging and destructive place we call the City of London.

Last year the US Conference Board put out forecasts for the 58 most important countries across the global economy for the next ten years and predicted that the French economy would be the worst performer. It forecast an average growth rate of 0.2 per cent for France over the next five years, and 0.3 per cent over the next ten years. If these forecasts are right, that may support the Anglo Saxon view. On the other hand, its forecasts for the UK weren’t much better.

Last year the ‘Economist’ ran a controversial article claiming that France was the time-bomb at the heart of Europe.

It went down in France about as well as the idea of New Zealand wine.

But looking forward, well actually, we might as look backward. The difference in French and Anglo Saxon ideology goes back centuries. And neither side has yet won the argument.

©2013 Investment and Business News.

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The evidence is growing.

Take the IMF, for example. According to its latest report on currency reserves, developing countries rid themselves of $45 billion worth of dollars last year. Since Q2 2011 they have sold $90 billion dollars. Over the same period, the developed world has been a net buyer of dollars, and in 2012 was even a net buyer of sterling.

See: Currency Composition of Official Foreign Exchange Reserves (COFER)

Meanwhile, Bloomberg quoted Hans- Guenter Redeker, the head of global currency strategy at Morgan Stanley, who has predicted that within two and half years the euro will be back to parity with the dollar. Capital Economics cited data from the US Commodity Futures Trading Commission which showed that speculative “long futures positions against the euro, sterling and yen combined have topped 200,000 for the first time since last May and are not far off a record high.”

So what’s next? The recent movements in favour of the dollar can’t go on without interruption. Capital Economics predicts some kind of correction in the next few months, but says that looking further ahead to the end of this year and beyond, the dollar is likely to rise further against the euro.

No prizes for guessing why. Following the Cypriot debacle, there is now speculation that Slovenia will be the next Eurozone country to suffer a crisis, and the markets have become scared of the Eurozone. There is a good reason for this. But what about the yen and the good old pound? Central banks in the UK and Japan are expected to hit the QE button hard this year. But so what? Japan’s prime minister and arch dove Shinzo Abe has warned that achieving a 2 per cent inflation target in Japan may not prove possible.

There is an irony here. In the UK, the Bank of England has failed to get inflation even close to target. In Japan, the central bank may fail likewise but in the opposite direction. In Japan, the challenge is getting inflation up. Later this year, rises in commodity prices may lead to a temporary lift in Japanese inflation, but it is far from certain that this will last, and the central bank may yet prove to be impotent.

In the UK we have had £375 billion of QE so far, and while the initial burst may have kicked some life into the economy, subsequent rounds have done very little. The truth is that at a time when banks are being forced to raise capital levels, and the government is afraid to borrow the money, the markets want to lend to it at such cheap rates, QE is about as effective as a leadless pencil. In short, the Bank of England may be impotent too.

For that reason, Capital Economics reckons that while the dollar may well rise against the euro, against the yen and sterling it thinks the rises against the US currency are behind us. Against the euro, of course, it is a different story.

©2013 Investment and Business News.

Investment and Business News is a succinct, sometimes amusing often thought provoking and always informative email newsletter. Our readers say they look forward to receiving it, and so will you. Sign-up here