21 January 2009

If we really are broke, avoid the IMF at all costs (literally!)

As promised, I'm picking up on one of the points which Paul Mason raised yesterday: that Ireland may be on the verge of calling in the IMF for emergency loan funding because the economic situation there has got so bad. The exact quote is from a Forbes article - the crucial paragraph reads:

Prime Minister Brian Cowen, while at an investment conference in Tokyo on Wednesday, was reported to have endorsed the view of an Irish union leader that the parlous state of Ireland's public finances could lead to the IMF ordering mass dismissals of public sector workers. Dan Murphy, the general secretary of the Public Service Executive Union, had previously told his branch members that the Fund could intervene if public spending was not curtailed, according to the Irish Times.


In the interests of balance, I should point out that most of the rest of the Forbes article is devoted to making the case that the Irish situation isn't that bad - yet. But the main point is: does the IMF really think that mass dismissals of public sector employees (or alternatively huge wage cuts) is the way forward for economic policy in a slump? That would depress economic activity still further, increasing the risk of a vicious deflationary spiral, with mass unemployment.

Keynesian economic theory suggests precisely the opposite course of action: increase public sector hiring and net wages, funded by borrowing. Ireland can cut back when growth has been restored. To do so now would be economic suicide.

Joe Stiglitz has already done the best possible expose of the right-wing lunatics who run the IMF so I will refer you to his book Globalization and its Discontents if you haven't read it already. Suffice to say that these guys are still living in a 1980s Thatcherite fantasy, which has been responsible for a huge amount of economic hardship for the poorest and most vulnerable people in the world for several decades now.

In the wake of the appalling losses announced by RBS on Monday and the continuing fall in the share prices of the three major UK-based banks, commentators' thoughts are turning increasingly to the thought that the UK may be pushed into a situation where it can't borrow at reasonable rates on the international credit markets any more, and the IMF has to be called in. Ambrose Evans-Pritchard in the Telegraph offers probably the most factual and least hysterical analysis of the current situation that I've seen so far.

What should policymakers do if the UK really is insolvent - if the banking losses are so large, and/or the recession so severe in its impact on the public finances, that the UK's credit risk gets downgraded to the point where it becomes another Iceland - no longer able to raise sufficient borrowings to meet its liabilities? Two obvious options present themselves. One, calling in the IMF for emergency assistance. I think this would be a terrible course to take. The IMF do not understand basic economic theory and would decimate living standards and destroy social cohesion in their bid to 'balance the books'. It would make the 1976 IMF package look like a tea-party. This has to be avoided AT ALL COSTS.

A second option would be to "do an Iceland" - default on the UK banks' debts. This could trigger the collapse of the entire global banking system. Even the most patriotic commentators out there don't recommend that, fortunately.

Which leaves only one course - using 'quantitative easing' ("printing money") as a substitute for borrowing. Essentially the UK government would fund expenditure by expanding the money supply. This is a very, very dangerous course of action - in normal circumstances (i.e. not an economic depression) it would run the risk of triggering runaway inflation (look at Zimbabwe for an extreme case). When the economy is suffering a deep depression that's not necessarily the case because (a) the price level may actually be falling, and (b) there are huge reserves of unemployed people and physical capital which can be brought into play by expanding government spending - without increasing inflation. But this is damn risky business and should only be tried as an absolute last resort. However, despite the risks, it's still LESS risky than getting the IMF idiots in to run things.

As I say, hopefully the situation is not that bad, and we will look back on this talk of defaults and IMF emergencies with some amusement in - say - 12 months' time. But it's beginning to look worryingly real - as the lead singer in Spinal Tap might say, "a bit too much f***in' perspective".

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