January 08, 2004

The IMF Wishes the Bush Administration Had a Very Different Fiscal Policy

The IMF wishes that the Bush administration had a different and less stupid fiscal policy:

WSJ.com - IMF Report Sees U.S. Budget Gap Driving Up Rates: Soaring U.S. government debt will drive up interest rates world-wide by as much as a full percentage point, hampering investment and growth, the International Monetary Fund says. According to an IMF report, if cumulative budget deficits rise by 15% of gross domestic product, as the Congressional Budget Office expects, world interest rates would be pushed up by one-half to one percentage point over 10 years.

The IMF said that U.S. deficits have helped the world economy in the short term by cushioning the effect of the burst stock-market bubble and the September 2001 terrorist attacks. But in coming years, as the economy recovers and the cost of Medicare, Social Security and the Bush tax cuts mount, the deficits will increasingly put a drag on growth. World capital markets are more and more integrated, and budget deficits in one country draw on a global pool of savings. For example, foreigners own 31% of all Treasury debt outstanding, according to Bianco Research LLC, a financial research firm. IMF researchers found that when U.S. inflation-adjusted interest rates move one percentage point, average world rates move 0.6 point.

Federal Reserve Governor Donald Kohn sounded a similar warning yesterday, saying that "If the fiscal path does not change ... interest rates will be higher than they otherwise would be." That would reduce capital spending and purchases of houses and autos, he said. In the late 1990s, large inflows of foreign investment and a government surplus helped finance domestic investment, he said in a speech to the Federal Reserve Bank of Atlanta. "A few years from now we may have less of the former and none of the latter." The Bush administration expects the budget deficit to top $500 billion in the current fiscal year, or about 4.5% of GDP...

Posted by DeLong at January 8, 2004 12:23 PM | TrackBack


Now the IMF has joined the coalition of the shrill. Who is next?

Posted by: joe on January 8, 2004 12:56 PM


On Social Security and Medicare: "Closing this fiscal gap would require an immediate and permanent 60 percent hike in the federal income tax yield, or a 50 percent cut in Social Security and Medicare benefits."

Typical IMF rubbish! Finally countries such as Argentina have learned how destructive the conservative IMF stances are. The heck with the IMF fear-mongering about Social Security and Medicare.

When I calm down there will be more.

Posted by: anne on January 8, 2004 01:21 PM


The IMF fear-mongers are providing a rationale for cutting back social benefit programs when these programs are in no way a threat to our well-being and when these programs are going to be of utmost importance to protect an aging America. This rubbish seems lifted from the austerity game that has been waged against developing states at the sign of an economic down-turn. Thus, a down-turn becomes an ever more severe crisis.

Wake me when the IMF does a darn thing to help a Korea or Thailand or Brazil or Argentina or Nigeria or South Africa in crisis.

Posted by: anne on January 8, 2004 01:24 PM


I saw Rubin on TV the other day, and he basically admitted that the IMF was essentially a tool of U.S. policy. That explains why it suggested draconian social insurance cuts as a cure. But that is also why it is so extraordinary that it gave such a withering diagnosis of and prognosis for the economy.

Posted by: joe on January 8, 2004 01:31 PM


Interest rates up by a "full percentage point"!

Well, that's it. Where's my survivalist backpack? I'm outta heah.

Posted by: Ellen1910 on January 8, 2004 02:56 PM


Interest rates up by a "full percentage point"!

Well, that's it. Where's my survivalist backpack? I'm outta heah.

Posted by: Ellen1910 on January 8, 2004 02:57 PM


"The Bush administration expects the budget deficit to top $500 billion in the current fiscal year, or about 4.5% of GDP..."

Isn't that aproximately equal to the expected GDP growth rate for 2003? Isn't it fair to argue then that ALL of this year's worth of economic growth has been pretty much borrowed against future growth? Had that money been spent mostly on things aimed at really enhancing future growth, things could be different, of course... I am tempted to call this the "dynamic trashing of America's superb economy". Anyone has a better bumper sticker description?

Posted by: Jean-Philippe Stijns on January 8, 2004 07:23 PM


Frankly, I wouldn't look for economic advice from an NGO with a long history of doling out loans to astronomically bad credit risks.

Posted by: Alan K. Henderson on January 8, 2004 11:58 PM


Speaking of "stupid":

Can anyone here tell me why "free" trade true-believers (like Brad DeLong) aren't "leading the (political) charge" to wean us AND the world off the so-called "strong (or "petro") dollar"? I mean, how is pretending to believe in THAT political-economic fiction in OUR national interest?

That is to say, what REAL economic benefit accrues to "average" Americans (or, for that matter, average earthlings) when demand for US private equity and PUBLIC debt is artificially stimulated (by obliging other countries to park their foreign exchange reserves in US securities) while highly placed "transnationally corporate" resident aliens on Wall Street AND in Washington (like Greenspan and Rubin etc. etc.) vainly engage in flights of sophistic fancy attempting to explain away the persistent, pernicious (and growing) US trade (and budget) deficits (not to mention "consumer" debt) as thousands AND millions of "Made in the USA" jobs (as well as entire industries) together with our moral, ethical, socio-economic and environmental standards--not to mention our standard of living move "off-shore" to low wage, cheap currency, labor camps posing as countries in other parts of the world?

It's painfully obvious by now even to the casual observer, that NOBODY--other than a TINY handful of obscenely rich people (and/or their institutional "agents")--benefit, even in the short term, from this "arrangement". So why don't central bankers, political leaders and economists EVERYWHERE, across the ideological board, inside the various system(s) and out, scream "bloody murder" about the situation?

Well, I think the reason is: They're stupid.

Either that or they're "compromised"--bought and paid for--in a word: corrupt.

Or they're scared. Spineless. Gutless. Worthless. Useless.

Of course, I don't claim to be omniscient. I'm willing to admit I COULD be wrong. If anyone around here thinks he or she has a better "theory", I'm "all eyes".....

>Strategic Analysis 2000 , January 01, 2000

>Interim Report: Notes on the U.S. Trade and Balance of Payments Deficits

>Wynne Godley

>"If the United States's balance of trade does not improve, the country could eventually find itself in a 'debt trap'..."

> http://www.levy.org/2/index.asp?interface=standard&screen=publications_preview&datasrc=f73a207294

>April 11, 2002

>US dollar hegemony has got to go

>By Henry C K Liu

>"There is an economics-textbook myth that foreign-exchange rates are determined by supply and demand based on market fundamentals. Economics tends to dismiss socio-political factors that shape market fundamentals that affect supply and demand.

The current international finance architecture is based on the US dollar as the dominant reserve currency, which now accounts for 68 percent of global currency reserves, up from 51 percent a decade ago. Yet in 2000, the US share of global exports (US$781.1 billon out of a world total of $6.2 trillion) was only 12.3 percent and its share of global imports ($1.257 trillion out of a world total of $6.65 trillion) was 18.9 percent. World merchandise exports per capita amounted to $1,094 in 2000, while 30 percent of the world's population lived on less than $1 a day, about one-third of per capita export value.

Ever since 1971, when US president Richard Nixon took the dollar off the gold standard (at $35 per ounce) that had been agreed to at the Bretton Woods Conference at the end of World War II, the dollar has been a global monetary instrument that the United States, and only the United States, can produce by fiat. The dollar, now a fiat currency, is at a 16-year trade-weighted high despite record US current-account deficits and the status of the US as the leading debtor nation. The US national debt as of April 4 was $6.021 trillion against a gross domestic product (GDP) of $9 trillion..."

> http://www.atimes.com/global-econ/DD11Dj01.html

>IMF says U.S. debt a threat to world

>By Elizabeth Becker and Edmund L. Andrews


>January 8, 2004

>"WASHINGTON With its rising budget deficit and ballooning trade imbalance, the United States is running up a foreign debt of such record-breaking proportions that it threatens the financial stability of the global economy, according to report released yesterday by the International Monetary Fund.

>Prepared by a team of IMF economists, the report sounded a loud alarm about the shaky fiscal foundation of the United States, questioning the wisdom of the Bush administration's tax cuts and warning that large budget deficits pose "significant risks" for the United States and the rest of the world..."

> http://www.signonsandiego.com/news/business/20040108-9999_1b8imf.html

Posted by: Mike on January 9, 2004 12:51 AM


Bush's fiscal policy is now shown to be parallel to that on global warming. Call the style SUV policy: wasteful an pointless, crushes sensible road-users in any collision, and eventually rolls over when the tires blow.

Posted by: James on January 9, 2004 12:54 AM


"foreigners own 31% of all Treasury debt outstanding.."

Almost one third. Is there an optimum, or safe, or danger levels?

Posted by: northernLights on January 10, 2004 10:51 PM


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