IMF’s fears over [world] economy must be heeded

A long-argued thesis of mine, here is yet more support. It’s too bad there’s no mention of Peak Oil or Global Warming/Climate Change here, though. These are no doubt the two greatest challenges (or, to be more specific, apocalyptic calamities) that will grind civilization either to dust (population-wise) and destroy much of the technology and information we’ve accrued during the Age of Oil.

And it should be obvious to most of you that not too many people are doing anything about it.

The Six Stages of Job Loss
Stage 1: Shock and Denial
Stage 2: Fear and Panic
Stage 3: Anger
Stage 4: Bargaining
Stage 5: Depression
Stage 6: Temporary Acceptance

You ready for it? Who or what will you stand for, in the end? What message will your life and death be sending out to those around you?

Sorry about the delay in posting, for those of you who were on my feed; I’m now back in school to finish my bachelor’s. I’m also hoping to get Part 2 of the “Second Coming” series out by today. [update: okay, maybe by Saturday]
[note: taken from google news, where it seems the actual fears are far from the dominating header, as would be expected]

You can’t expect the International Monetary Fund to come out and say the world is headed for a global financial crash. And it isn’t saying that.

But what it is saying, in its own careful way, is that the risk of such a calamity is increasing.

This may sound quite strange, given the fact that its latest World Economic Outlook is forecasting for 2007 the fourth consecutive year of strong global growth.

But it is why Raghuram Rajan, the IMF’s chief economist, told a press briefing in advance of the IMF and World Bank annual meetings that got underway in Singapore this weekend that he was feeling “a little schizophrenic.”

As he put it, we are in a world with strong growth projections, but also one in which the downside risks are growing. And those risks have increased since the previous IMF economic outlook in April.

The most difficult risk is that of a “disorderly adjustment” of what finance officials call the global imbalances. This is a way of saying the global economy is skewed and it cannot keep on this way.

On one side is the huge and growing build-up of U.S. borrowings from the rest of the world to finance its unsustainable trade and budget deficits, and on the other, countries such as China and Japan ringing up huge trade surpluses with the United States and lending their surplus funds back to the U.S. to finance its deficits.

This cannot go on forever because the cost of servicing that debt would become too high, and well before that, the foreign investors in U.S. securities would become extremely nervous about continuing to add to their already high holdings of U.S. dollar assets.

The big question is whether these global imbalances can be corrected in an orderly way or whether there will be a disorderly adjustment instead. (If there is a disorderly adjustment, the IMF warns, there could be “a substantial further appreciation of the Canadian dollar.”)

Kenneth Rogoff, the former chief economist of the IMF, warns that the U.S. “is now soaking up roughly two-thirds of all global net saving, a situation without historical precedent.” This year, the U.S. is expected to borrow $800 billion (U.S.), or about $2.2 billion a day.

As he argues, though, “this borrowing binge might end smoothly,” but world financial leaders are right to be worried about “a more precipitous realignment that would likely set off a massive dollar depreciation and possibly much worse. Indeed, if policymakers continue to sit on their hands, it is not hard to imagine a sharp global slowdown, or even a devastating financial crisis.”

In its latest World Economic Outlook, the IMF appeals to the major economic players to avoid a “disruptive adjustment scenario,” which could be triggered by a worldwide loss of appetite for U.S. assets combined with a significantly increased interest rate risk premium.

This would lead to a severe fall in the growth of the U.S. economy and harsh adjustment in the rest of the world, with a global recession.

A major concern, the IMF says, is the risk of “a severe disruption in financial markets, hurting productive capacity, depressing access to credit and aggregate demand and leading to asset price deflation.” Our homes and RRSPs would be worth a lot less and many people could lose their jobs.

The IMF doesn’t see markets by themselves correcting the imbalances. For this to happen, foreign investors would have to acquire a much larger volume of U.S. assets, equivalent to 85 per cent of U.S. GDP, from about 30 per cent now. This is not realistic.

So what the IMF hopes for is what it calls “the strengthened policy scenario,” which would include greater exchange rate flexibility in China and other countries in Asia to accommodate a devaluation of the U.S. dollar, a move by the U.S. to deal with its huge budget deficit through both spending restraint and tax increases, more measures by Europe and Japan to raise productive growth and additional spending by the major oil producers in their economies.

There will be lots of talk at the Singapore meetings by finance ministers about determination to act. But will anything happen?

An early test has been the Doha round of world trade negotiations. Because individual countries put short-term domestic interests first, it looks as though Doha could fail.

If we cannot make progress there, it is unlikely we will make progress elsewhere. So the IMF’s fears should be taken seriously.

David Crane’s column appears on Sunday. He can be reached at by email or by fax at 416-926-8048.

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