“Tug of War”

From the IMF:

MUSCAT, Oman—Painting a dark outlook for the global economy, the International Monetary Fund on Thursday issued an “urgent” call for the world’s largest economies to roll out more growth-boosting policies.

The IMF said central banks need to maintain their easy-money policies and the Group of 20 largest economies must prepare contingency plans should a stagnating outlook turn into a downturn.

About the Fed:

Federal Reserve officials are looking more confidently toward an interest-rate increase before the end of the year, possibly as soon as September, as financial markets have stabilized after Britain’s vote to leave the European Union and the economy shows signs of picking up.

“If it´s summer, this must be Greece”

And we´re on to the seventh chapter of the IMF-Greece-Germany Slapstick:

A truce between Greece’s creditors averts an immediate panic over Greek bankruptcy this summer, yet as officials and onlookers digested the deal, it became apparent that less was agreed than meets the eye.

ANALYSIS

The deal, struck in the small hours of Wednesday morning at the Eurogroup meeting of eurozone finance ministers in Brussels, broke an impasse between Germany and the International Monetary Fund that was holding up Greece’s bailout funding for this summer.

The main breakthrough, heralded by German Finance Minister Wolfgang Schäuble, is that the IMF agreed in principle to rejoin the Greek bailout effort this year with new loans. In return, Germany and other eurozone countries pledged to restructure Greece’s rescue loans in 2018 “if…needed.” That promise fell short of the IMF’s demand that Europe should decide now how it would relieve Greece’s debt in coming years.

But the IMF’s main negotiator at the talks, European department head Poul Thomsen, stressed at a news conference early Wednesday that the fund isn’t on board just yet. The eurozone still needs to tell the IMF what it is prepared to do in 2018, consenting to a menu of debt-relief measures for later use, he suggested. “We will need to assess the adequacy of the measures, and we will only go ahead if there is an assessment that they are adequate.”

Mr. Schäuble on Wednesday dismissed Mr. Thomsen’s caveats, insisting that new IMF loans were now assured. “He probably was tired then,” Mr. Schäuble told reporters.

…………………………………………………………………….

Mr. Thomsen on Wednesday hailed the IMF’s main gain: a promise by German-led eurozone creditors to undertake a far-reaching restructuring of Greek debt in 2018. “We welcome that it is now recognized by all stakeholders that Greek debt is unsustainable, and…that Greece will need debt relief to make that debt sustainable,” he said.

However, Germany previously promised the IMF and Greece in 2012 that it would offer debt relief later if needed—only to reject such a move afterward, citing Greece’s failure to implement all of its promised economic overhauls.

The latest debt promise hinges once again on Greece’s ability to complete its side of a tough bailout plan that has proved beyond the political stamina of all Athens governments so far.

Germany´s trick is to make contingent promises, when it knows the conditions will be impossible to meet!

Meanwhile, Greece´s RGDP has acquired a Bell-shaped appearance, capped below at the 1999 level!

These shenanigans remind me of a post from 5 years ago:

The nature of these meetings is that the hallway chatter is always more interesting that the formal program. Part of the reason why is that, particularly when talking to journalists, the businesspeople or politicians tend to regard those conversations as off the record. So I’ll abide by that here. One of the German execs was a consultant, and the other headed what I’ll call a quasi-official German organization.

They were slightly irritated by the pessimism I’d expressed earlier in the day. “Don’t you realize,” one of them said, “that the cost to us (Germany) of bailing out Greece is far less than it cost us to reintegrate East Germany after the wall came down in 1989?”

I almost choked on my croissant. Yes, I replied, I am aware of that. I lived and worked in Berlin as a journalist in the mid 1990s, when that very painful (economically speaking) process was taking place in Germany. But doesn’t that, I said politely, rather beg the question: Germany integrating their brethren, who’d been isolated and impoverished during the cold war, was a dream come true, whatever the cost. Germans, on the other hand paying to bail out Greece is, to average German, rather the opposite of a dream come true, is it not?

He waved me off. No no, he said, it will be taken care of. The Germans, he said, understood how beneficial to them membership in the euro zone has been. Without it, the gentleman said, the value of the Deutschemark would be 50% or 75% higher than it is under the euro. “German industry would be wiped off the map.”
Why Germany needs the euro

Here was my ‘choking on my croissant’ moment number two. Most economists would agree with what my friend at the meeting had said; but he seemed either oblivious (not likely) or simply unconcerned (more likely) with the flip side of what he had just uttered. Italy, to take the third-largest economy in Europe, one with a sizeable and modern industrial base, is stuck with a currency — the euro — which is stronger than the old lira would be under current circumstances. But membership in the euro zone means Italy can’t devalue to bring some relief to its exporters.

I pushed back politely. Look, I said, it’s not Greece I’m worried about. It’s Italy. Third-biggest bond market in the world. Bond spreads this morning again heading over 7%(before the ECB intervened this to push them back down again.) Too big to fail, too big to save. Is the government, even one under a new Prime Minister, going to push through sufficient austerity to avoid a default?

Now the consultant perked up, speaking what he too believes to be the unvarnished truth. They have to, he said, because “to be blunt about it, we have them [both the Greeks and the Italians] by the balls.”

And make no mistake – that, in essence, is where the European crisis stands.

It seems it still does!

“Misdemeanor”

And a serious one when perpetrated by the IMF´s Chief-Economist with colleagues who write: Oil Prices and the Global Economy: It’s Complicated:

Even though oil is a less important production input than it was three decades ago, that reasoning should work in reverse when oil prices fall, leading to lower production costs, more hiring, and reduced inflation. But this channel causes a problem when central banks cannot lower interest rates. Because the policy interest rate cannot fall further, the decline in inflation (actual and expected) owing to lower production costs raises the real rate of interest, compressing demand and very possibly stifling any increase in output and employment. Indeed, those aggregates may both actually fall. Something like this may be going on at the present time in some economies. Chart 3 is suggestive of a depressing effect of low expected oil prices on expected inflation: it shows the strong recent direct relationship between U.S. oil futures prices and a market-based measure of long-term inflation expectations.

…Our claim is simply that when an oil importer’s macroeconomic conditions warrant a very low central bank interest rate, a fall in oil prices could move the real interest rate in a way that runs counter to the positive income effect.

But the “causation” they allude to, from oil prices to expected inflation is just a figment of their collective imagination!

If they only looked at a longer time period (beginning in 2003 when the inflation expectation became available), they would have difficulty establishing even a simple correlation.

What you do notice in the chart above is that oil prices and inflation expectations fall in tandem when there is a negative demand shock. That´s very clear in 2008/09. More recently, since mid-2014, there the Fed has also tightened monetary policy – a negative demand shock. The tightening was initially expressed through Fed words and has been reflected in NGDP growth slipping, expected one year ahead FF rate rising, the dollar index rising (dollar appreciation) in addition to the oil price fall, among other indications of monetary policy tightening!

 

NGDP: A sufficient statistic

From the IMF´s Making Monetary Policy Decisions in the Dark:

In the wake of the global financial crisis, monetary and fiscal policies were used aggressively to counteract the effects of the crisis on economic activity. Policymakers look at a number of indicators to guide them in assessing an economy’s level of activity relative to its productive capacity. But trying to figure out the position of the economy in real time is often quite challenging, with consequences for setting policy.

Obviously, they didn´t look at the one that “tells it all”! That´s NGDP growth falling way below trend!

The IMF Tells the Bank Of Japan To Hit The Gas? What About The U.S. Federal Reserve?

A Benjamin Cole post

The International Monetary Fund on May 22 badgered the Bank of Japan to adopt a more-aggressive growth stance, even though the island nation posted Q1 real GDP growth of 2.4%, and an annual inflation rate of 2.3%—along with an unemployment rate of 3.4%.

Moreover, under the leadership of Governor Haruhiko Kuroda, the BoJ is buying about $83 billion in bonds a month, a quantitative easing program equal in size to that of the U.S. Federal Reserves’ Q3 at its peak—except that Japan has an economy one-half the size of the United States.

Nevertheless, the IMF warned the “BOJ needs to stand ready for further easing, provide stronger guidance to markets through enhanced communication, and put greater emphasis on achieving the 2% inflation target.”

Fair enough. Maybe the BoJ needs to really pour it on.

Um. What About the Fed?

So, the United States’ posted Q1 real GDP dead in the water, and many are forecasting Q2 not much better. The core PCE deflator is now running at 1.3% YOY, with headline deflation, and the Fed has not reached its 2% inflation target for seven years, except once, and that fleetingly. The U.S. producer price index has been in deflation for several months. The U.S. unemployment rate is 5.4%, and a squishy figure at that.

Yet Fed Chair Janet Yellen never misses a chance to rhapsodize about raising interest rates, and on May 21 warned that Fed cannot wait too long before tightening the monetary noose or it will “risk overheating the economy.”

BTW, also from the Fed: “Industrial production decreased 0.3% in April for its fifth consecutive monthly loss.” Capacity utilization is at 78.2%, below the long-term average.

Conclusion

Yellen has new definition of “overheat,” and that is any room temperature warm enough to melt ice cream. And the IMF…well, what can you say. They appear seriously confused.

IMF Growth Forecasts: “Going, Going…Gone?”

Jon Hilsenrath has a take in “What If This Is As Good As It Gets?”:

The International Monetary Fund’s spring meetings are turning into a depressing affair. By April every year in the wake of the financial crisis, it seems the world’s top finance officials and central bankers are busy revising down expectations for annual growth and navigating some brewing financial storm. And so it is in 2015. Washington’s cherry blossoms are in full bloom and so is economic angst and frustration.

Unfortunately, world growth forecasts are still “shrinking”, so it “could get worse”!

Continued negation of monetary policy IMF version

Blanchard, the IMF´s Chief-Economist writes:

Turning finally to policy recommendations.  Given the diversity of situations, it is obvious that policy advice must be country-specific. Even so, some general principles continue to hold. Measures to sustain growth both in the short and the longer term continue to be of the essence. With the introduction of quantitative easing in the euro area, monetary policy in advanced economies has largely accomplished what it can.

No, it has only gone as far as it wants, which is not far enough!

An extreme example:

The charts indicate that Greece at the present time has a great depression which is proportionally almost equal to the depths of the US great depression in early 1933. At this point in the cycle, however, the change in the monetary policy regime by FDR in March 1933 had allowed the US to show a significant recovery. The most favorable reading for Greece is that the depression has stagnated!

IMF: “Get used to it “

Ambrose Evans-Pritchard writes “Exhausted world stuck in permanent stagnation warns IMF“:

The global economy is caught in a low-growth trap as innovation withers and the population ages across the Northern Hemisphere. It will not regain its lost dynamism in the foreseeable future, the International Monetary Fund has warned.

The IMF said the world as a whole has seen a “persistent reduction” in its growth rate since the Great Recession and shows no sign of returning to normal, marking a fundamental break in historical patterns. [It seems that what I called the “Bernanke Break” is much more pervasive]

This exposes the global economic system to a host of pathologies that may be hard to combat, and leaves it acutely vulnerable to a fresh recession. It is unclear what the authorities could do next to fight off a slump given that debt ratios are already at record highs and central banks are running out of ammunition.

The “Dream World” of the IMF

The IMF will host the third Conference in the “Rethinking Macro Policy” ‘franchise’ (soon they´ll catch up with “Fast & Furious”!)

Not having been very successful in sorting the problems with macro policy during the last few years in RMP I & II, they now assume that the world has mended:

The focus of our conference will be instead on the architecture of policy when (hopefully) policy rates have become positive again, and most countries are growing and have stabilized debt-to-GDP ratios.

In other words, how will/should macro policy look once the crisis is finally over?

Economists are fast getting into the fiction business!