Notes From Underground: The IMF’s Role Has Become Too Subjective to be Objective

One upon a time, the IMF‘s mission was to aid countries suffering balance of payments problems and dealing with the possible credit problems that would arise for over-extended nations. Recently, the Christine Lagarde-led IMF has acted in a more aggressive capacity when it became involved in the bailouts of the debt-plagued European peripheries. The IMF took a proactive stance in becoming one of the troika–ECB, European Commission, IMF–in an effort to stem the stress of Greece, Portugal, Cyprus (and possibly Spain and Italy). The IMF became involved not because Europe was lacking the funds but because the Germans were wavering as to how far the ECB should go in expending capital to bail out the so-called PIIGS. The European elites called upon the IMF to use its funding power to alleviate the pressure from Berlin’s demands that debtors undertake severe austerity in order to resolve the problems of recession and budgetary malfeasance. IMF Director Lagarde was very happy to open the IMF’s treasury to her comrade’s in arm: the European finance ministers. Remember, prior to Lagarde’s position at the IMF, she was the French finance minister.

There’s a June 19 Financial Times article titled, “IMF URGES EUROZONE BOND PURCHASES.” The IMF’s evaluation of the eurozone finds low inflation is stifling demand and growth. If the inflation data remains low, the ECB should undertake large-scale asset purchases on the order of the FED and the BOJ. The problem is the IMF is a large creditor to the European Union through its backstopping of peripheral debt and any advice the IMF provides is tainted by its creditor role. Of course the IMF wants to stimulate growth with extraordinary measures because under IMF statutes it is the more senior creditor and wants to get paid as fast as possible. The conflict thus renders any IMF advice tainted and it should be treated as being on the order of _______ (fill in the blank). The problem for the world is that the IMF was considered a “cleaner up” of debt problems but is now in the business of promoting proactive policy. As an unelected body this becomes very problematic for the global financial system as the world’s GOALIE WANTS TO BECOME A FORWARD.

***In following up on Wednesday’s piece about Yellen’s abysmal press conference, others are noting the poor performance by Chair Yellen and it is not the usual voices. The very measured Art Cashin opined on CNBC Friday that “their credibility is somewhat at risk and you begin to hear that around the Street.” Cashin was specifically pointing to the dramatic rally in gold on Thursday. Many pundits maintain that with continued low inflation there is no reason for gold’s price to rise. As readers of NOTES FROM UNDERGROUND know, in my opinion it is not inflation that has driven GOLD higher for the past decade but rather concern about central bank CREDIBILITY IN A FIAT CURRENCY WORLD. If the world’s banks lose investor trust then fear will push gold and hard asset prices to extraordinary levels. Stop looking for inflation to be instigator of a rally in precious metals for that is a fool’s mission. Gold has not performed well for the last two years because the EQUITY MARKETS became the haven for investors in a zero interest rate environment, especially after Mario Draghi prevented a massive insolvency of the European financial system. The global markets deemed the world’s central bankers to be in control of events and were thus willing to wade into global equity and bond markets.

It is FED CREDIBILITY that underpins the entire global financial edifice. As Janet Yellen has deemed all policy thresholds to be subject to the FOMC interpretation, the market will assume all FED GUIDANCE TO BE JUST NOISE. My opinion was/is that Yellen would err on the side of ensuring wages to rise to be able to resolve the growing inequality in wealth and income that has grown over the last 20 years. Again, the private sector unions have little bargaining strength and plays a large part in the growing disparity of incomes. The private sector unions have been struggling to save jobs at the expense of wage gains. So even under Bernanke the FED seems to have become the advocate for private sector pay. But without PRODUCTIVITY GROWTH it will be very difficult to achieve wage growth, unless of course corporate profits as sliced. So again, Janet Yellen cannot be both a great friend of labor while a “friend” of Wall Street. Zero interest rates are not a policy for growth and ZIRP’s success at sustaining paper wealth creation does have an expiration date.

***Further on the Gold Market: The GOLD recovered against the dollar on Thursday but also against all international currencies. The GOLD/EURO, gold/Swiss  and GOLD/YUAN all closed above their 200-day moving averages for the first time in many weeks. This was definitely due to a massive bout of short covering but these moving averages must be watched as support areas for any correction in the gold market. More importantly, GOLD performed well even as the equity Markets were at all-time highs. Another key to the precious metals complex was that the GOLD/SILVER cross trading through its 200-day m.a. for the first time in months, lending to support to a comprehensive precious metal rally.

In a Bloomberg News piece, “Gold Options Signal More Gains As Yellen Shakes Out Boredom” (Debarati Roy), it is noted by a large metals trader,”The political turmoil in Iraq and Ukraine continues to provide support, but the main reason for the rally is Yellen.” Ben Bernanke openly stated that he didn’t understand the GOLD MARKET but what is more important is that the GOLD MARKET understands the Fed. In the 1980s it was openly stated that Fed Chairman Paul Volcker viewed gold as the enemy of central policy and attempted to destroy the value of his enemy. Janet Yellen may want to read Volcker’s papers on the importance of fiat money and Fed credibility … if any exist.

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9 Responses to “Notes From Underground: The IMF’s Role Has Become Too Subjective to be Objective”

  1. ShockedToFindGambling Says:

    Yra- Good piece.

    Based on what I have read, I am not sure that the Europeans understand that the low inflation that they are experiencing is a symptom of their problems and not the cause. I have seen many articles that say low inflation if THE problem.

    In an ideal economy, productivity (as you mentioned) would increase, real wages would increase, and inflation would decrease (we know this typically does not happen).

    In the real world, increasing economic activity typically leads to more competition for workers, raw materials, and finished products, leading to inflation.

    Trying to pump up inflation, without an equivalent increase in economic activity, will weaken the economy.

    You said a lot of this in your blog.

  2. Joe Says:

    Re the IMF (and The World Bank). Are these not just RELICS of a idyllic (according to the WSJ editorial board) bygone era known as Bretton Woods?

    Re Gold. I’ll bet an overlay chart proves your theory to be correct.

  3. asherz Says:

    The Fed had as its mission the stability of prices and integrity of the financial system when it was created a century ago. But in 1978 it received its dual mandate with the passing of the Full Employment and Growth Act . Didn’t the Fed take off its pads at times to play forward as well as goalie since that time as well?
    And isn’t a prime impediment to economic growth the Debt/GDP ratio that face much of the sovereigns around the world, from Japan to Greece to the U.S. and many in between? Has anyone calculated what a very reasonable 2% increase in interest rates would do to the US budget and the economy with $17.5T in national debt.? That is Sequestration ($85B) x 4+ in additional debt service.
    What are the implications for paper money in that scenario?

  4. arthur Says:

    Well, “the most beautiful deleveraging yet seen” is how Ray Dalio describes what is now going on in America’s economy.

  5. asherz Says:

    Dalio’s “beautiful deleveraging”, said some years ago, was referring to the private and financial sectors. However this phenomenon was replaced by massive increase in government and Fed debt since 2009. Any increase in interest rates at this point or in the next few years will have a severe impact on the economy. You can almost carry an almost unlimited amount of debt if you pay no or little interest. That is, as long as the markets trust your creditworthiness…

  6. Ronald Ferrill Says:

    This was totally predictable and another parasite on those in the world who desire freedom, peace, and love work, seeing in work a blessing. And, it is definitely like a Goalie (soccer) wanting to become a Forward/Wing (Hockey) – put skates on them and they’ll likely fall or get shunted into the boards (one can hope)

    LeGarde might just as well be a mouthpiece for the Obama administration.

    Time for the IMF to be disbanded – unfortunately they’ll probably be expanded in both sized ($$$ from us) and scope of power (even more $$$ from us)

  7. arthur Says:

    Monetary policy number one: Lower interest rates
    Monetary policy number two: Quantitative easing
    Monetary policy number three: WE DON’T KNOW

    That’s a beautiful deleveraging via Barrons / Ray Dalio:

  8. yra Says:

    Arthur–thanks for the repost of the dalio piece

  9. Rob Syp Says:

    In the past 10 years the futures industry/NFA has gone through Refco, MF Global, PFG Best and now Vision. I have had accounts at 3 of them and is this a reflection of the zero rate interest policy or 10 year continous slide in interest rates or something else? What can the remaining FCM’s do not to become another news headliner?

    If the custodians of our money can’t make it then how can we trying to beat these markets?

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