As more countries copy the Federal Reserve’s monetary policy without the global demand of the US dollar, financing trade and fiscal deficits printing a weakening currency, nations become more dependent on the US dollar.
Neither domestic nor international citizens demand local currency, and governments continue to build large fiscal and trade imbalances believing the magic money tree will solve everything. However, as confidence in their domestic currency collapses, global US dollar-denominated debt soars because very few investors want local currency risk and central banks need to build US dollar reserves to cushion the monetary debasement blow.
Implementing aggressive so-called expansionary policies almost always backfires because the impact on growth of large spending plans is minimal, and the destruction of purchasing power of the currency rises.
Governments always want to believe that they will be able to disguise their imbalances with monetary debasement, but the effect is the opposite.
It is, therefore, no surprise that most global currencies have depreciated against the US dollar even in a year of high Federal reserve injections and commodity price rises. When a commodity exporting country sees its currency collapse despite rising exports, you know that -again- the myth of modern monetary theory has evaporated.
As the domestic economy and currency in countries like Brazil, Argentina or Turkey get worse, governments turn the blame to the International Monetary Fund.
The relationship of countries with the International Monetary Fund (IMF) always makes the headlines when governments have already spent the money they borrowed and do not want to return it. Interestingly, few seem to criticize the IMF when it rescues governments from their fiscal imbalances, and harsh comments only surface when the money must be paid back.
The first thing that citizens should understand is that the best relationship that a government should have with the IMF is the same that we have with borrowing. Use it the least possible.
Citizens must understand that the objective of the IMF is not to solve the structural problems of an economy, but to provide liquidity and help governments to maintain their credit position.
If a government squanders the money it has raised and destroys its confidence, that is not the IMF’s fault. Moreover, if that government continues to increase imbalances as if funds were free and irrelevant, neither the IMF nor any other global credit entity is going to rescue it.
The IMF’s problem is not that it is too demanding with governments or that it suffocates economies, but that it is extremely benign with profligate governments and that it never stops states that solve everything by raising taxes and sinking taxpayers’ disposable income. If the IMF is to blame for something it is for being often too kind on extractive and confiscatory government policies.
In the last thirty years, the world has experienced more than 100 financial crises. Coincidentally, these periods of bubble expansion and subsequent crisis are driven by misnamed “expansive” government plans, by central banks increasing money supply without control and governments tend to present themselves as the solution to problems created by their own policies.
The IMF rarely tells governments what to do. At best, it suggests and tends to be extremely accommodative to tax hikes. For the IMF, government is the pillar of credit credibility, and public spending is rarely questioned. While the IMF does acknowledge the rising burden on taxpayers and the impact of increasing the tax wedge on growth and employment, it rarely penalizes governments that overspend and overtax. The usually excellent IMF papers and empirical analyses are almost unanimous in showing the negative impact on growth and jobs of tax hikes and the poor, if not negative, fiscal multipliers of government spending, but the organization itself seems so scared of being called a defender of austerity that it has stopped recommending fiscal prudency.
The problem with recommending spending and borrowing in periods of low rates and excess liquidity is that, when everything explodes, governments complain of alleged “austerity” requests. When the IMF suggests to moderate spending, states rebel, even if they have squandered previous support.
The International Monetary Fund usually responds to all crises as follows:
– Accepting the measures of governments from a constructive, diplomatic and benign perspective.
– Recommending liberalization measures and budgetary moderation plans that either are never carried out at all, or have been aimed, as in Argentina or the European crisis, at supporting hypertrophied state structures at all costs. Almost all the “austerity measures” implemented in the past thirty years have relied heavily on tax increases, and not on reducing current spending, which further weakens economies.
International organizations rarely curb the governments’ desire for intervention and on many occasions encourage it.
It is true that the International Monetary Fund may be wrong in its predictions, but it is one of the most accurate international bodies and, when it is wrong, it is usually out of optimism, accepting the expectations of the government in office as valid.
The relationship that governments should have with the IMF is the same that you have with your lawyer or your lending bank. Try to use them as little as possible.
Argentina and other emerging economies’ problems have not been created by the IMF. If the IMF can be accused of anything it is of having been optimistic with the governments’ promises.
The lesson of this crisis is that, if governments want to avoid negative consequences in the future, they should ignore the siren calls that tell them to increase imbalances to “grow”. History has proven that spending and borrowing today always leads to a crisis tomorrow. Two plus two does not equal twenty-two. The less they copy the Fed or ask for IMF support, the better.