Pictures are more powerful than words, in many cases. The Economist this week had a graph that presented the cycle of private non-financial sector credit as a % of GDP for a number of countries. The chart was in the article, Free Exchange: Red Ink Rising – China cannot escape the economic reckoning that a debt binge brings. The article, and chart, highlight how for countries such as Japan, Thailand (and the Asian financial crisis of the late 1990s), US (sub-prime crisis of 2007) and Spain, all things that go up (such as debt) have to come down. The chart worryingly shows how China’s debt binge has been in the making for a long time, and has accelerated since 2008. The real issue is when and how to unwind the debt without unhinging the world economy and killing off growth. Few countries have been able to do so at such high levels of debt – that’s the problem.
And as if that was not enough, last Wednesday’s US print edition of the Financial Times carried an article that again highlighted the IMF’s misplaced clarion calls for coordination. The article, IMF calls for global action to lift demand as China exports fall, reports on the IMF’s number 2 (David Lipton) in a speech in which he called on global leaders to increase spending and investment in parts of their economies that would create growth. This is of course a classic Keynsian drive for government spending, at a time when debt remains significant. The IMF continues to ask the right question – we do need coordinated action. But the IMF continues to conclude the wrong response – we don’t need more governance spending, at least overall. We might leverage targeted spending in some Infrastructure areas. But we need a lot more coordination in policy change and that takes time. If the US elects an establishment favorite in its national elections this November, that country will not make the changes needed. If Trump were to be elected, and the republicans stay in control of the House and Senate, there will be 2 or 3 years of the kind of disruption that would clear the house of cobwebs and overly complex tax and business and private regulation. And large chunks of non-productive government spending should be cut back, leaving funds spare for real effective infrastructure spending.
But what the IMF should be doing is helping the leading nations of the world cope with financial volatility. It should require leading central bankers to form up and create a new currency exchange agreement to help manage the dynamics that are killing global trade and driving the beggar-the-neighbor devlations that are hiding under the rune of negative interest rates, and sometimes not hiding in terms of currency manipulation. We don’t need fixed exchange rates – we need managed exchange rates – for a period that allows normal, private sector growth to return. We need a new Bretton Woods agreement. We need a new Plazza Accord. We need the IMF to do it’s job, not shirk its responsibility and hand off that impossible task to individual governments.