IMF: We Screwed Up

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FT Alphaville reporting:

Christine Lagarde has urged countries to put a brake on austerity measures amid signs that the IMF is becoming increasingly concerned about the impact of government cutbacks on growth. Ms Lagarde, IMF managing director, cautioned against countries front-loading spending cuts and tax increases. “It’s sometimes better to have a bit more time,” she said at the annual meetings of the IMF and the World Bank on Thursday.

The fund warned earlier this week that governments around the world had systematically underestimated the damage done to growth by austerity.

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Where Did All The Money Go?

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Friends and colleagues often ask me “Where did all the money go? someone somewhere must have it!”. I too used to wonder – until I read this dinner speech by Benoît Cœuré, Member of the Executive Board of the ECB, which was delivered to the BIS-ECB Workshop on global liquidity a few days ago. This is well worth reading, as it is written clearly, it is a short piece (recall, it’s a dinner speech!) and it explains to a large part what happened to the global economy over the last 15 years.

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Why I Oppose Financial Stability

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Democracies are supposed to strive to deliver outcomes that advance the greater good of society.

In a number of posts here on baobab2050.org I have been making the case that reining in public sector deficits (the fiscal austerity) and curing the persistent imbalances in the external accounts of Eurozone countries (Northern Euro / Southern Euro) are necessary but not sufficient prerequisites for the return of growth.

The third essential prerequisite is that the great losses caused by the past debt-financed excesses will have to be written off and banking systems restructured or forcibly recapitalized as necessary.

This is also the central argument of blogger London Banker in his latest post Why I Oppose Financial Stability, which I recommend to readers. Here is the gist of his post on the subject:

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Sir Mervyn King: Most Serious Financial Crisis At Least Since The 1930s, If Not Ever

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Sir Mervyn King was speaking after the decision by the Bank’s Monetary Policy Committee to put £75billion of newly created money into the economy in a desperate effort to stave off a new credit crisis and a UK recession. Sir Mervyn said the Bank had been driven by growing signs of a global economic disaster.

“This is the most serious financial crisis we’ve seen, at least since the 1930s, if not ever. We’re having to deal with very unusual circumstances, but to act calmly to this and to do the right thing.”

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Fate of the Euro: More Indecent Proposals

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Hans Olaf-Henkel, the former head of the Federation of German Industries (BDI) who has joined about 50 other business leaders in a legal challenge at Germany’s Constitutional Court against the Greece rescue package, wrote an opinion piece for the FT where he calls for a European hard core – Austria, Finland, Germany and the Netherlands – to break away from the Euro.

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The Synchronized Global Jenga Block Games

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In Australia, economist Steve Keen describes the RBA’s upcoming meeting as “High Noon Tuesday”.

In Europe, Mike Shedlock covers the ongoing escalation of the Euro’s existential nightmare, as Italian, Belgian and Spanish bond yields hit Euro era highs in what at this stage may have become a self-fulfilling crisis.

In China, property loans in 2nd and 3rd tier cities have been halted, driving another nail in the coffin of their property bubble.

In Canada, GDP has unexpectedly contracted.

And the USA appears to be on the verge of a significant slowdown, with a Dow Jones ESI indicator and a fall in petroleum products consumption adding to the mounting evidence that a recession is a real risk.

Some might call this a chance coincidence of unrelated events. Some might be wrong: please consider the Baobab post titled Avalanches of Sand for a related discussion on the theory of catastrophic network failures.

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Others’ Versions of the Indecent Proposal

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Following Bailout 2.0 for Greece, with its convoluted Euro-speak terms (which have been translated into hilarious but on-target summaries by Macro Man) I have since read five six different essays on the subject, aspects of which appear to be heading in the general direction taken by the Indecent Proposal.

The key point of the Indecent Proposal was this:

Creditors around the world have already lost their money. Now these creditors need to accept it so the world can move past the bailouts and onto more important things – such as allowing opportunities for everyone who is willing and able to work to earn their livelihood.

The Indecent Proposal can also be described as a pre-emptive strike against a flight-path to disorderly disintegration. A similar flight path was followed by the late Roman Empire during its centuries of decline. The taxes levied in the effort to sustain “the System” were so great that in the end the constituent parts found that “the system” was no longer worth keeping. If this is Europe’s current flight path, then a controlled crash landing in a ploughed field would be infinitely preferable to a tailspin followed by a massive fireball and a second Dark Age.

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