Wednesday, 8 May 2013

George Osborne and the IMF - the blind leading the blind

Stock markets are generally a much better forward economic indicator than ‘independent’ forecasters, and the indices around the world are climbing, this is in part driven by the need for investors to find better yields but it’s also a sign that the money men think the worst is over or that the balance of risk has moved in favour of the real economy and away from sovereign bonds.   
Against this back drop of soaring stock markets the UK economy is having its annual health check from the IMF and like a sickly patient waiting in the surgery waiting room there is some nervousness.  Much of this nervousness comes from the fact that we are surrounded by a large number of ailing economies with high contagious problems, most of who hail from southern Europe.  Unfortunately one of the examining ‘doctors’, has already pronounced on our untimely demise without any examination.  In an ill-informed outburst, the IMF's chief economist, Olivier Blanchard, recently accused the UK of "playing with fire" by persisting with growth-destroying austerity.
Since 2008 the UK has performed worse than most other ‘developed’ economies, this is due to our reliance on the banking and financial services sector and the structural deficit that emerged due to a lower tax take from these businesses.  Making a correction to resolve this structural problem, equivalent to 6% of the economy, is proving to be very painful, but there are early signs that we are well into our convalescence.  Banking profits are rising, even RBS made a substantial profit in the first quarter, and these profits will eventually flow through to the exchequer and the wider economy.  Linked to the banking sector is the housing market and again there are some reasonably solid signs that recovery is under way.
The evidence supporting the IMF’s view is pretty weak and points again to the generally poor service this organisation provides the world economy.  The IMF ‘missed’ warning signs in the run up to the financial melt-down and then became invisible during the Lehman crisis and they are still playing catch up.  The IMF is also a very European centric organisation (Blanchard is French as is the current MD Christine Lagarde) and they never pass-up the opportunity to bash the Brits.  It’s likely that, following their detailed examination over the next three days, they will recommend a less austere approach. 

A marriage made in heaven - Osborne and Lagarde

This is missing the point completely.  George Osborne has presided over one the greatest con tricks in political history, claiming to be the Iron Chancellor whilst actually being soft on reducing the public deficit, the result of which is the deficit has hardly been dented but employment rates have been protected.  This cautious approach to dealing with our public finances has infuriated many of us but is can hardly be described as austerity.
So what is the IMF up to?  Their main priority is saving the Eurozone and if they can convince the UK to pump up our economy this will have benefits for the exporters in the Eurozone and as one of the largest importers of European goods the UK is a vital component in the wider European economy (we are the second largest economy in the EU).  Obviously George Osborne should resist their advances robustly and we should focus on solving our problems and rebalance away from banking dependency and EU dependency.  Despite his best efforts our economy is mending and we are probably well in advance of Europe whose major economies; France, Italy and to some extent Germany are in denial of the structural changes required.  This reconstruction of the UK’s economy has been achieved by stealth through the effects of quantitative easing (QE), which has the effect enforcing haircuts on all creditors by the introduction of a negative real interest rates, this obliges saintly savers to pay for the bad debts of the boom and provides banks with the time and liquidity that they need to rebuild their balance sheets.
The issue for the IMF and Britain specifically will be how we can now kick the drug of QE without slipping back into recession.  Perhaps Mr Blanchard should confine his thinking and remarks to this problem rather than promoting the policies of the Jurassic period – see my post

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