Wednesday, April 13, 2016

The IMF is fostering risk

Faced with a complete failure of traditional monetary policy and a global economy that is expected to nosedive this year (except in some right pockets like India and the US), several central banks around the world, most notably the ECB and the BoJ, have introduced a Negative Interest Rate Policy (NIRP), a quixotic formulation in which using the banking system is discouraged in favor of anything else - hopefully an increase in the velocity of abundant money, but most likely in a cash economy. It seems that with fiscal policy failing, governments are increasingly bending on central banks to find a monetary solution to the problem of slowing growth. This is of course ridiculous, as monetary policy exists in an ecosystem created by fiscal policy, and cannot act independent of it.

What is ludicrous is that the IMF, which is supposed to promote stability in the world economy and has tried to do so by specifically forcing developing economies to change their fiscal policy, has now endorsed this approach. According to some voodoo economics, an NIRPof up to a small negative rate can increase velocity of money while avoiding a cash economy from proliferating. Of course, the report itself agrees that its recommendations are based on very little data (which can usually be fitted to mean anything), which is all the more reason to be surprised and even angered by the IMF's endorsement of NIRP.

On a more philosophical scale, NIRPgoes against sheer economics related to the cost of money, as well as democratic ethos of people being able to do what they want with their money (including not spending it). If the real economy really had an NIRP, it would be reflected in inflation, and there would be no need for central banks to impose an artificial rate every quarter. Simply put, nobody would save money if stuff was getting cheaper and cheaper by the day. There is such a clear divide between the real economy and the wonderland that is monetary policy that the entire exercise appears to be a sham. The IMF should be lecturing governments on how to change their economies to create real jobs and real value, instead of trying to live off a fake, financial economy. It has consistently done this for years, and the fact that it has not chosen to do that in this case smacks of everything from racism to incompetence. 

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