“The day will come when this period of exceptionally loose monetary policy, both conventional and unconventional, must end. In the long-term it is clear that exit will involve phasing out, and ultimately reversing all of these policies.”
--Christine Lagarde, Managing Director, IMF, Aug. 23rd, 2013
It is the IMF’s position that:
1. Monetary policy has been exceptionally loose for the past five years.
2. That this monetary stimulus has provided “breathing space” for the accomplishment of structural and fiscal reform.
3. That, in the long run, it is the reforms that are important, while the unconventional monetary policies must be brought to an end.
4. That central banks will need to cease providing loose money, and will have to manage the risks associated with “exit”.
Each of these statements is completely wrong, and on many levels.
First of all, there is no evidence that monetary policy has been loose since Lehman. Money growth since the crash has averaged in the mid-single digits for the US, the UK and the EZ, and in the low single digits for Japan. Not only is such growth not rapid, it is a bit low by the measures of the past thirty years. Should you look at a graph of money growth since the crash for the major economies, you will see no evidence of exceptional looseness. Further, if money policy were exceptionally loose, wouldn’t we be seeing inflation? Inflation in the major economies is near an all-time low. The statistical evidence is that money policy has been overly restrictive since the crash, so there is nothing to exit from.
Secondly, rapid money growth would indeed have provided breathing space for reforms that improved competitiveness. But rapid money growth did not occur. Instead, the IMF has forced the PIIGS to perform surgery on themselves in the middle of a depression, thus producing high unemployment. You can’t breathe when you’re drowning.
Thirdly, the prioritization of structural reform over nominal growth is utterly misguided. The world’s problem is the output gap caused by inadequate aggregate demand, not labor market rigidities or budget deficits. Policies that create unemployment hurt aggregate demand. What the world needs right now is an end to structural reform and budget austerity until growth returns to a more normal level. Reform and austerity are killing the patient.
Fourth, it is fallacious to say that monetary stimulus must be brought to an end when it has not been tried. Since there is nothing to “exit”, there are no risks to manage. The risks emanate from the deliberate continuation of restrictive monetary and fiscal policies resulting in inadequate demand. The IMF has the gall to talk about the risk of inflation when the real and present danger is deflation.
The principal risk facing the world economy today is the market’s realization that the monetary authorities lack the ability to stimulate aggregate demand because they falsely believe that they are already providing stimulus--indeed too much stimulus. That means a future of ultra-low inflation, inadequate demand, and a growing output gap. It also means ongoing fiscal pressure as debt rises while government revenue stalls.
Ms. Lagarde says that thinking about global economic and financial stability is the IMF’s raison d'être. That’s a lot of money the world is spending for bad advice.