Tuesday, April 21, 2009

IMF Hints that G7 Countries Alone Cannot Prevent Depression

The IMF recently suggested that the traditional capitalist powers are cash strapped, and incapable of driving the world economy out of recession.
This recession is likely to be "unusually long and severe, and the recovery sluggish," said the Fund, releasing two advance chapters from its World Economic Outlook. However, it warned there is a risk that it could spiral down into a full-blown slump unless further action is taken to stop "feedback effects" gathering force.
Mr. Strauss-Kahn (head of the IMF) called for a urgent action to "cleanse banks" of toxic assets and for further fiscal stimulus beyond the 2pc of global GDP already agreed. The snag is that high-debt countries may have hit the limits already.

"The impact becomes negative for debt levels that exceed 60pc of GDP," said the Fund.

What was the public debt to GDP ratio of the traditional capitalist powers, the G7, even before the bank bailouts ?

United States, 61 %
Japan, 170 %
Germany, 63 %
United Kingdom, 47 %
France, 67 %
Italy, 104 %
Canada, 62 %

Source: CIA Factbook 2007 and 2008

This may be behind the rumors of a press to get the IMF to sell part of its gold reserves. Though sold on the open market, one presumes most would end up with China, the oil-exporters, or perhaps Russia and India - countries that desire larger gold reserves. In return, the IMF would dramatically bolster its lending capacity.

It's unlikely an IMF gold sale would be endorsed by the United States. And I don't necessarily agree with the IMF's conclusions. The US can probably borrow quite a bit more than 60 % of GDP, without a "negative impact" to itself. But, large US debt offerings do crowd out other countries, particularly developing ones.

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