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IMF Admits Austerity Doesn’t Work

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Probably one of the biggest stories this year and completely missed by the MSM has been the IMFs change of the fiscal multiplier, that it bases its austerity on, from 0.5 to 0.9-1.7%. This is for all practical purposes an admission that austerity does not work. Try telling that to the Irish, Greek, Portuguese, Argentinians and other countries worldwide that have been on the receiving end of the IMF’s policies.

Courtesy of Steen Jokobsen, chief economist at Saxo Bank in Denmark
Read more at http://globaleconomicanalysis.blogspot.com/2012/10/imf-admits-it-prescribed-wrong-medicine.html#DI5sYuUoQDPyZmOT.99

Is IMF short for I must fail?

Fiscal Multipliers are wrong, IMF admits – the biggest macro story this year

The big story this week is the International Monetary Fund’s (IMF) admission that the fiscal multiplier is not 0.5 percent but really 0.9-1.7 percent according to Financial Times article It’s (austerity) Multiplier Failure

This is actually not just big news, but massive news! For the IMF to let alone realize and then admit this is central to the outlook for growth and fiscal deficits across all economies. Let’s walk through the maths here:

The fiscal multiplier defines that 1 percent of austerity will net cost 0.5 percent of gross domestic product (GDP) – but now the IMF says it is higher. Hence, its whole approach of austerity at any cost is losing its academic as well as practical application.

If the fiscal multiplier is larger than 2.0 percent you have an extremely vicious circle. You are enforcing a diet which will kill the patient rather than heal him, as for every percent you reduce in spending you lose 2 percent in growth.

The bigger the hole you dig, the harder the climb back up! Do you think it is a random decision that the IMF made 1.7 percent the top of its range? Hardly!

The fact that only FT Alphaville in its “The IMF game changer” has spotted and written about this is close to being scandalous. It tells us that the Anglo Saxon press’ need for supporting Keynesian initiatives (buying time, maximum interventions and pretend-and-extend) at all costs is done for political reasons rather than for finding real solutions to this crisis which is now spinning out of control as systemic risk is at an all-time high.

The IMF has increased the systemic risk by extending the payback period of central planners’ calculations (much lower growth and higher fiscal/structural deficits). The market knew this, but it is such naive forecasts produced by the IMF which dictate policy recommendations for the debt crisis. The IMF is ironically seen as the ‘expert’ although it has experiences considerably more failure than success in its “helping efforts” – think Asian Crisis, Russia, EU debt crisis! The IMF is asking for your patience – extend-and-pretend squared is here!

It is sad that it took this long though! This has been discussed at length before by me (interview in April with TradingFloor.com), plus in the FT (whose writers deserve much credit). The most prominent voice on this topic has been Soc. Gen’s excellent economic team led by Ms Michala Marcussen – who I happened to study with a couple of ‘wars’ ago at the University of Copenhagen.

What we need now is for policymakers to start producing credible forecasts which politicians cannot misuse. The IMF started this, so will the Federal Reserve, European Central Bank and Bank of England take note? Will the Congressional Budget Office in the US reduce its growth forecast? (See link for how this has been done in the past). Probably not, but the IMF’s admission this week is a game changer. You can’t save yourself to prosperity, not even in the eyes of central planners anymore! The IMF admission also proves what we have known for a long time: Macro stinks!

Finally, and most importantly, this creates a need for something new – which is the very theme I keep emphasizing. Let’s work on creating the fundamentals for the micro economy which will create more jobs. The strongest multiplier, after all, remains taking one person out of the unemployment queue and putting them into a job. This reduces the subsidies needed as the person earns a taxable salary, is probably less ill, feels better, spends more etc. So the real challenge the IMF and other central planners need to realize is: You can help, but only by going away and taking a holiday. The S&P 500 (excluding financials) has a Return on Equity (ROE) in excess of 20 percent this year. It is based on an economy growing at 2.0 percent! So, do you need more proof?

President Clinton is in growth terms one of the most successful US presidents in history. What did he do politically for eight years – except for smoking cigars? Nothing! Belgium was without a government for almost two years and every single macro indicator improved during this spell. I rest my case! Let’s have total radio silence for five years and we will all be in a better place!

Mike Shedlock goes on to say

Wrong Medicine In terms of governments doing nothing for five years (as in no more stimulus) I am in agreement, if that is what Steen means (but I am not so sure that’s precisely what he means). Nonetheless, while were at it, let’s get rid of Fed meddling as well.

As for the multiplier theory, the IMF is now saying it prescribed the wrong medicine.

What was a .5 multiplier is now a range of .9 to 1.7. Anything close to or above 1 means austerity can never work.

No doubt, Krugman will be crowing “I Told You So” over this, but there is not an Austrian economist anywhere that was in support of the massive tax hikes we have seen. Reduction in government spending was not the problem. Rather massive tax hikes and lack of badly-needed reforms was the problem.

Certainly what we know is austerity cannot work “as implemented” but I said that years ago. We have seen massive tax hikes and few work rule and pension reforms. We needed lower taxes, less government, and massive work rule reforms (and still do).

Blaming the problems on “austerity” will get a lot of sympathy from Keynesian clowns, but they cannot distinguish good medicine from cow patties.

Source: http://globaleconomicanalysis.blogspot.com/2012/10/imf-admits-it-prescribed-wrong-medicine.html

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Talking Union

The One Percent is not only increasing their share of wealth — they’re using it to spread millions among political candidates who serve their interests. Example: Goldman Sachs, which gave more money than any other major American corporation to Barack Obama in 2008, is switching alliances this year; their employees have given $900,000 both to Mitt Romney’s campaign and to the pro-Romney super PAC Restore Our Future. Why? Because, says the Wall Street Journal, the Goldman Sachs gang felt betrayed by President Obama’s modest attempts at financial reform.

On this week’s Moyers & Company (check local listings), Bill is joined by two veteran journalists to discuss how the super-rich have willfully confused their self-interest with America’s interest. Guests are Chrystia Freeland, author of the new book Plutocrats: The Rise of the New Global Super Rich and the Fall of Everyone Else; and Rolling Stone magazine’s Matt Taibbi, who…

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Mexico To Restrict Cash Transactions

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Another country has joined the list for limiting cash transactions by it citizens. Mexico has signed into law, a ban on large cash transactions carrying a minimum penalty of 5 years in prison.

Large Cash Transactions Banned In Mexico … Outgoing Mexican President Felipe Calderon has signed into law a ban on large cash transactions. The ban will take effect in about 90 days and it is part of a broader effort to control monetary flows within the country. Under the law, a Specialized Unit in Financial Analysis operating within the Attorney General’s Office will be created to investigate financial operations “that are related to resources of unknown origin.” For real estate transactions, cash payments of more than a half million pesos ($38,750) will be forbidden and, for automobiles or items like jewelry, art, and lottery tickets, cash payments of more than 200,000 pesos ($15,500) will be forbidden. The law carries a minimum penalty of five years in prison. – Forbes

and as the Daily Bell put it

The power elite intends to lock down the world, it seems, in order to track every monetary transaction of any significance.

We wrote about this trend previously in “Spain Bans Cash.” Here’s an excerpt:

… As we have long predicted, the phony “sovereign debt” crisis in Europe is being used to justify all sorts of authoritarian measures.

…..

these national bans continually pressure more and more freedoms, including the freedom of shielding one’s wealth from prying eyes. And that’s just the point …

In the last 2 years the following countries have made similar restrictions.

Source: The Daily Bell

Celtic Tiger Comeback My Arse

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Yesterday Irish Taoiseach(Prime Minister) Enda Kenny returned home empty-handed as yet again no bank debt agreement was reached during the EU summit. Many times since his party FG and their coalition parties Labour have come to power, they have promised to take on the bullies in Europe. Indeed Labours leader Eamon Gilmore came to power shouting “Labour’s way or Frankfurt’s way “. Embarrassingly for both parties it has been Frankfurt’s way.

 

The message from Merkel and Germany is clear. Thanks for bailing out German and French banks but its too late now for a deal, so just pay your debts.

 

Despite the Irish Government’s propaganda concerning the economy (including Enda Kenny appearing on front cover of TIME magazine), Eddie Hobbs (economists) writing in the Wall Street Journal summed it up best. 

Prime Minister Enda Kenny recently graced the cover of Time magazine. But according to data from the International Monetary Fund, Ireland has displaced Japan as the world’s most indebted economy. Government, household and nonfinancial company debt add up to 524% of Irish GDP. (The Central Bank of Ireland uses a different basis for calculating the debt of nonfinancial firms; its estimate for total debt would be lower than the IMF’s.) Funding this gargantuan load at an average cost of 4.5% would swallow nearly 24% of GDP—in other words, Ireland’s entire industrial output.

Yet still a Celtic comeback is prophesied. There are three huge problems with this myth:

• Irish taxpayers are still paying for the mistakes of Irish banks. Having started the crisis with a sovereign debt-to-GDP ratio approaching 20%, Ireland will have added another 100% before it’s over. And in a perverse reversal of democracy, two-thirds of this load was foisted on the Irish under pressure from the unelected board of the European Central Bank to save German, French and British banks—together with a panoply of other bank bondholders—from the consequences of their investment decisions.

Nowhere in the euro zone have so few citizens been asked to carry so much to save the union. But even today, with Ireland having met all the targets its creditors have set, there remains stiff resistance, especially from the ECB, to restructuring this part of Ireland’s national debt.

Relying on soft diplomacy, the Irish government seeks to sell its shareholdings in the functioning banks it saved to the new bailout fund, and to ease the punishing burden of repayments on the emergency liquidity provided to Anglo Irish Bank by extending the loan term to 40 years. The total plowed into banks is €64 billion, about 40% of Irish GDP.

• Irish household debt is still unsustainable. According to the IMF, household debt, which currently is as large as Ireland’s national debt, will stand at 185% of disposable income in 2017. The Irish are expected to arrive at this level from a peak of 210% by saving 14% of their income, nearly half of which would have to be redirected into debt repayments. So a decade after the crisis began, Irish household debt will arrive at a level well above the starting point of other crisis economies.

One in five Irish mortgages is in arrears. Yet four years into the crisis the Irish government has failed to introduce a modern, balanced and dignified insolvency regime, relying instead on a mishmash of laws, many of them Victorian and one of them, the Sheriffs Act, dating back to the 13th century.

Modern insolvency legislation would at the very least provide timelines to work through distressed debt. But such reform is being stiffly resisted behind the scenes by the banking lobby and the ECB. The result is a fiasco for Irish families, as the great game of “extend and pretend” continues. The urgent introduction of a standardized insolvency process matched to the scale of bad debts must also be supported by the European Stability Mechanism if fresh capital buffers are required.

Irish labor costs—especially in the public sector—are still too high. Since 1987, the Irish Parliament has callowly transferred wage-setting power to labor unions via the “social partnership” process. But a 2010 deal with public-sector unions, signed amid a brutal period of layoffs and pay cuts in the private sector, goes farther still by fixing pay and pensions for government workers at extraordinarily high levels through 2014. The agreement was named after Ireland’s largest secular temple: Croke Park, headquarters of the Gaelic Athletic Association, where the deal was struck.

Its effect, hardly sporting, is to privatize job losses from the recession and crowd out essential public services. In Greece, Portugal, Spain and Ireland, government employees already enjoy among the EU’s highest pay premia over workers in the private economy. But pay within the Irish public sector is also well above EU levels.

Pay for hospital consultants, teachers and nurses is singled out as especially high by the IMF. Local Irish county managers are paid more than most European prime ministers. Brendan Howlin, the minister in charge of reforming the public sector, is himself a former teacher and trade union activist. The inner cabinet of the Irish government—which comprises the prime minister, the deputy PM, the minister for finance and the minister for public reform—brings the intellectual firepower of three secondary-school teachers and a trade unionist to bear on Ireland’s crisis. All support the public-sector cartel.

The Irish government points to a reduction in public-sector numbers due to a recruitment freeze—as if those who take early retirement are abducted by aliens to a planet beyond the galaxy, and not into Ireland’s Ponzi pension scheme, which quadrupled its liabilities to €120 billion over the past decade while losing most of its assets to the bank bailout.

***

So while Time magazine and others eulogize the plucky leader of the Irish people, the truth is that Enda Kenny leads a Vichy government—captive externally to creditors that still insist on loading bank debt onto the sovereign, and internally to a tribe of insiders led by union godfathers in a deal that protects the government’s own excessive pay and pensions while bankers lean over its shoulders to rewrite insolvency laws.

This isn’t just crony capitalism. It’s crony democracy.

The funny thing is, in Ireland the Government and MSM have shut down any constructive debate on the economy. Certain economists and critics of the economic decisions of this and the previous government have almost been completely silenced.  As Eamon Gilmore says “put on the green jersey“, but isn’t the “patriotic card” always played when a Government is up to no good.

Source: Wall Street Journal

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