Tonight’s BLOG headline is attributable to my friend KM after a long conversation about the IMF and G-20 meetings that took place in Washington during the past four days. It appears that Japanese monetary policy was not the subject of derision but rather applauded as a strong measure to lift Japan’s domestic economy out of two decades of malaise. Let me be as clear as possible: There is a full frontal assault being waged on the German model of GROWTH THROUGH AUSTERITY. The first shot fired was several months ago when IMF economist Olivier Blanchard delivered a paper stating that the previous belief that the negative impact on GDP from austerity was not a multiplier effect of 0.5% but rather a greater measure of 0.9-1.5% in its impact so a decease in fiscal spending would create a much greater slowdown than previously thought. The battle was waged in the efforts to limit the sequestration in the U.S. even as IMF Managing Director Lagarde cautioned that U.S. tightening is “too much, too fast and it’s in the wrong place. It’s not right for the U.S. economy and it’s not right for the world.”
The recent academic attack questioning the reliability of the Rogoff/Reinhart work is another sword unsheathed against those promoting fiscal austerity during the time of slow global growth. The IMF has become the phalanx for pushing back against the “austerians” and thus easing the restrictions on EU budgets (or just say no to austerity and yes to any and all fiscal and monetary efforts to sustain growth). The Japanese were not the G-20 goat and even if the YEN depreciates the greatest impact will be on the Germans as they are direct competitors. If the Germans do not desire global growth then the end result will be Japanese corporations merely taking market share from German business. Without increased global growth it will merely be a game of profit transference. The amount of money spent on luxury autos will be stagnant but the money will flow to the most price competitive–Lexus versus Mercedes. The higher the EURO/YEN moves, the more the German economy suffers and the more content Christine Lagarde and her IMF cronies become.
The rest of Europe will suffer under a stronger EURO but the short-term pain will be nothing if it breaks the back of the German model of growth through austerity. The battle lines have definitely been drawn and the more the global economy muddles along the more the effort will be to curtail fiscal austerity. The efforts of the U.S. and the U.K. to achieve solid economic growth through aggressive monetary policy have achieved minimal success. ‘Monetary policy needs fiscal stimulus’ seems to be the path to increased GDP. If Germany wants to remain on the growth through austerity path there will be a price to be paid.
***The case of Germany being the target of G-20 and IMF “slings and arrows” can be found in various places:
In Monday’s Financial Times, Wolfgang Munchau has an op-ed piece: “Perils of Placing Faith In A Thin Theory,” which attacks all of those who have given so much credence to the Rogoff/Reinhart thesis of too much public debt acting as a drag on GDP. Many politicians wishing to curtail fiscal spending have cited this work as the qualitative source for the proposing of austerity. They pay tribute to the theory of Rogoff/Reinhart 90% threshold as being the tipping point of an economy reaching the a point of fiscal debt being a drag on growth, but the recent academic work has shown the argument to be full of faulty data. The Rogoff/Reinhart theory has been waylaid but what is interesting is that Chairman Bernanke and all the QE proponents who are operating monetary policy on theoretical basis have not had their policies questioned even as economic growth has not behaved according to theoretical projections.
Rogoff is on life support while the theoretical basis of Bernanke’s policies is not even getting a full exam. At a meeting of high level G-20 economists and policymakers, FED historian Professor Allan Meltzer asked, “Why has there been such a weak response to such extraordinary stimulus?” There was no good answer from the central bankers. But yet Bernanke and the QE theory of banking, which may in fact cause much greater systemic damage than Rogoff/Rinehart, remains the centerpiece of central banking and global policy response.
***Mario Draghi may have the biggest stake in the current austerity battle for the whole outright monetary transaction (OMT) was premised on a pledge of conditionality of increased budget austerity. No European sovereign borrower could get the needed funding unless conditions of fiscal severity were agreed to for the Germans would not approve funding without strict rules of financial engagement. If there is an emergency banking crisis in Spain, how will President Draghi be able to deliver in the face of a recalcitrant German guarantor of financing? Mario Draghi has claimed OMT an unmitigated success. It is not because it has yet to be tested.
***In another sign of IMF displeasure, the FT had an article on Thursday, “Osborne Girds for Battle With IMF.” It is more of the case being made against austerity. The British Chancellor of the Exchequer has promoted budget austerity as a key to British economic resurgence (and as Osborne maintains, this policy was previously supported and applauded by the IMF). The British economy has remained lackluster, even with a very aggressive quantitative easing policy in place. Therefore it is time to back off austerity. While the U.K. is being criticized the bigger target is elsewhere. If the academic basis of the budgetary policy is questionable, so is the policy. Germany is in the crosshairs.
***There’s an article in Monday’s FT by Giles and Harding, “Five Lessons From The IMF Spring Meetings.” The reporters sum it up: “The U.S. is asking Germany to create more demand at home to help the eurozone grow. Germany is unimpressed–suggesting that research is more often used to justify economic policy than to make it–but may be willing to allow slower austerity elsewhere in Europe.” This will be the key to the success of the full frontal assault on the German model. There is a new TROIKA: The U.S., Japan and the IMF. The target is German intransigence. I am not making a qualitative judgment on budgetary austerity for there is a time and place for various policies to be effective, but I am alerting all the readers of NOTES FROM UNDERGROUND that the lines of battle are in place.