IMF predicts US economy worse than world economy in 2010

The International Monetary Fund (IMF) has been in the news a lot lately. At the G-20 Summit on April 1, the leaders of the world's largest countries agreed to loan it hundreds of billions of dollars to be loaned to needy countries. Then, on April 21, the IMF issued an updated World Economic Outlook which predicted negative growth for the world in 2009 and a modest recovery beginning in 2010.

But their forecast for the United States was not so positive. They predicted that the United States economy will have zero growth in 2010, despite President Obama's stimulus package. In fact, they predicted that U.S. unemployment will climb, that year, to 10.1%.

The IMF also estimated that American foreign debt is now in the process of doubling from 4.5% of world GDP in 2007 to 9% of world GDP in 2009, and they saw a pretty good chance that the continuing U.S. trade deficits would cause a dollar collapse. They wrote:

The U.S. net external position [foreign debt] will also continue to deteriorate, as U.S. external borrowing needs remain substantial... Thus, concerns about global imbalances have not gone away. The financing of current account deficits [trade deficits], particularly in the United States, may still be problematic in the coming years. If the attractiveness of U.S. assets were to decline, for example, because foreigners became concerned that higher government financing needs would push up U.S. long-term bond yields, foreign investors might reduce their U.S. exposure, leading to an abrupt depreciation of the dollar [dollar crash]. (p. 38)

IMF Ignored Own Role in Causing Recession

The new IMF report argued that poor risk management by financial companies caused the great recession, intoning that "a central role in the current crisis has been played by the failure of risk management in financial institutions and weakness in financial supervision and regulation."  They noted that the failure at risk management is linked to "global imbalances" [imbalanced trade] across countries:

Global imbalances were an integral part of the global pattern of low interest rates and large capital inflows into U.S. and European banks, which in turn fostered a buildup of leverage, a search for yield, and the creation of riskier assets and house price bubbles in the United States and some other advanced economies." (p. 36)

If they were being honest, the IMF would have pointed out that they, themselves, caused the great recession when they failed to enforce Article IV of their Articles of Agreement which required that countries "avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage over other members."

These currency manipulations let the Asian governments practice mercantilism (the strategy of maximizing exports and minimizing imports), which, in the short-run, caused financial bubbles in the trade-deficit countries and, in the long-run, destroyed the conditions necessary for growing world trade.

Competent economists realized that imbalanced trade was taking the world economy toward disaster. Nouriel Roubini and Brad Setser have long been predicting the financial crisis that the world is now going through. They knew that the American consumer could not continue to pile up debt. And Richard Duncan predicted the same in his 2003 book (which he revised in 2005), The Dollar Crisis: Causes Consequences and Cures. In fact, Duncan even warned that the global imbalances would cause a great depression that would be the biggest economic story of the 21st century.

The Solution is Balanced Trade

So what was the IMF's solution to a great recession caused by trade imbalances? The IMF recognized that an end to the major trade imbalances was a critical part of its "benign" scenario for future world growth (p. 32).  But instead of recommending actions to balance trade, they recommended that the world's governments increase their loans to bankers, the same loans that have been failing to make a dent in the great recession since October 2008 when the United States Congress passed the $700 billion TARP bill and the Federal Reserve and Treasury started pouring long-term loans down the black holes of AIG, Fannie Mae, and Freddie Mac. Essentially, their self-serving recommendation was that banks get more loans from governments, with the most deserving bank of all being the IMF itself.  

There is an alternative. During WW II John Maynard Keynes, tried to set up an international system that would have kept trade in balance. But instead we got the IMF, World Bank and the WTO. Keynes' system was based upon balanced trade, not free trade. He understood that a world system which permitted mercantilism was not sustainable. He would require that trade surplus countries take down their trade barriers and stimulate their economies and would let trade deficit countries limit their imports and subsidize their exports. Maybe it's not yet too late to adopt Keynes' proposal.

As the new loans to the IMF demonstrate, we live in an age in which incompetence is not only tolerated but rewarded. All of the post-WW II international institutions have ignored Keynes' views on balanced trade. All of the America's post-WW II administrations were saturated with "free trade" ideologues who overlooked the flight of industry overseas, first to Japan, then China, and now India and other countries, which displaced millions of U.S. industrial workers, caused wages to stagnate, worsened the distribution of income and caused one economic bubble after another.

Even now Washington won't take action to bring trade into reasonable balance. Last year (2008), the U.S. trade deficit was $692 billion, about 5% of our GDP. It would employ about seven million industrial workers to produce that amount of goods.  Instead Washington tried to pump up the economy without fixing its trade deficit leak, taking out huge loans that will have to be repaid by our children.

The United States is in a great recession with no end in sight. Our failure to deal with our trade deficits threatens a dollar collapse. Yet still, the free trade ideologues at the international institutions and in Washington are unwilling to tackle the underlying problem.

The authors maintain a blog at tradeandtaxes.blogspot.com, and co-authored the 2008 book Trading Away Our Future: How to Fix Our Government-Driven Trade Deficits and Faulty Tax System Before it's Too Late, published by Ideal Taxes Association.
The International Monetary Fund (IMF) has been in the news a lot lately. At the G-20 Summit on April 1, the leaders of the world's largest countries agreed to loan it hundreds of billions of dollars to be loaned to needy countries. Then, on April 21, the IMF issued an updated World Economic Outlook which predicted negative growth for the world in 2009 and a modest recovery beginning in 2010.

But their forecast for the United States was not so positive. They predicted that the United States economy will have zero growth in 2010, despite President Obama's stimulus package. In fact, they predicted that U.S. unemployment will climb, that year, to 10.1%.

The IMF also estimated that American foreign debt is now in the process of doubling from 4.5% of world GDP in 2007 to 9% of world GDP in 2009, and they saw a pretty good chance that the continuing U.S. trade deficits would cause a dollar collapse. They wrote:

The U.S. net external position [foreign debt] will also continue to deteriorate, as U.S. external borrowing needs remain substantial... Thus, concerns about global imbalances have not gone away. The financing of current account deficits [trade deficits], particularly in the United States, may still be problematic in the coming years. If the attractiveness of U.S. assets were to decline, for example, because foreigners became concerned that higher government financing needs would push up U.S. long-term bond yields, foreign investors might reduce their U.S. exposure, leading to an abrupt depreciation of the dollar [dollar crash]. (p. 38)

IMF Ignored Own Role in Causing Recession

The new IMF report argued that poor risk management by financial companies caused the great recession, intoning that "a central role in the current crisis has been played by the failure of risk management in financial institutions and weakness in financial supervision and regulation."  They noted that the failure at risk management is linked to "global imbalances" [imbalanced trade] across countries:

Global imbalances were an integral part of the global pattern of low interest rates and large capital inflows into U.S. and European banks, which in turn fostered a buildup of leverage, a search for yield, and the creation of riskier assets and house price bubbles in the United States and some other advanced economies." (p. 36)

If they were being honest, the IMF would have pointed out that they, themselves, caused the great recession when they failed to enforce Article IV of their Articles of Agreement which required that countries "avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage over other members."

These currency manipulations let the Asian governments practice mercantilism (the strategy of maximizing exports and minimizing imports), which, in the short-run, caused financial bubbles in the trade-deficit countries and, in the long-run, destroyed the conditions necessary for growing world trade.

Competent economists realized that imbalanced trade was taking the world economy toward disaster. Nouriel Roubini and Brad Setser have long been predicting the financial crisis that the world is now going through. They knew that the American consumer could not continue to pile up debt. And Richard Duncan predicted the same in his 2003 book (which he revised in 2005), The Dollar Crisis: Causes Consequences and Cures. In fact, Duncan even warned that the global imbalances would cause a great depression that would be the biggest economic story of the 21st century.

The Solution is Balanced Trade

So what was the IMF's solution to a great recession caused by trade imbalances? The IMF recognized that an end to the major trade imbalances was a critical part of its "benign" scenario for future world growth (p. 32).  But instead of recommending actions to balance trade, they recommended that the world's governments increase their loans to bankers, the same loans that have been failing to make a dent in the great recession since October 2008 when the United States Congress passed the $700 billion TARP bill and the Federal Reserve and Treasury started pouring long-term loans down the black holes of AIG, Fannie Mae, and Freddie Mac. Essentially, their self-serving recommendation was that banks get more loans from governments, with the most deserving bank of all being the IMF itself.  

There is an alternative. During WW II John Maynard Keynes, tried to set up an international system that would have kept trade in balance. But instead we got the IMF, World Bank and the WTO. Keynes' system was based upon balanced trade, not free trade. He understood that a world system which permitted mercantilism was not sustainable. He would require that trade surplus countries take down their trade barriers and stimulate their economies and would let trade deficit countries limit their imports and subsidize their exports. Maybe it's not yet too late to adopt Keynes' proposal.

As the new loans to the IMF demonstrate, we live in an age in which incompetence is not only tolerated but rewarded. All of the post-WW II international institutions have ignored Keynes' views on balanced trade. All of the America's post-WW II administrations were saturated with "free trade" ideologues who overlooked the flight of industry overseas, first to Japan, then China, and now India and other countries, which displaced millions of U.S. industrial workers, caused wages to stagnate, worsened the distribution of income and caused one economic bubble after another.

Even now Washington won't take action to bring trade into reasonable balance. Last year (2008), the U.S. trade deficit was $692 billion, about 5% of our GDP. It would employ about seven million industrial workers to produce that amount of goods.  Instead Washington tried to pump up the economy without fixing its trade deficit leak, taking out huge loans that will have to be repaid by our children.

The United States is in a great recession with no end in sight. Our failure to deal with our trade deficits threatens a dollar collapse. Yet still, the free trade ideologues at the international institutions and in Washington are unwilling to tackle the underlying problem.

The authors maintain a blog at tradeandtaxes.blogspot.com, and co-authored the 2008 book Trading Away Our Future: How to Fix Our Government-Driven Trade Deficits and Faulty Tax System Before it's Too Late, published by Ideal Taxes Association.