Sheldon Filger-blogger for GlobalEconomicCrisis.com
Christine Lagarde, chair of the International Monetary Fund- – IMF- – added to the anxieties of the rich and powerful gathered for the annual pilgrimage to Davos , Switzerland for the World Economic Forum. Cutting the IMF forecast for 2019 from 3.7 % to 3.5 %, she was acknowledging what is already widely known; there are a growing number of indicators that the global economy is headed for a hard landing.
There is growing instability in major economies, for example the Brexit snafu afflicting the UK and the European Union. There is political gridlock in the USA. And then there is China, the economic gorilla in the room,
The trade wars initiated by the Trump administration have harmed both American and Chinese economies. But China is facing other forces; a growing level of indebtedness afflicting both public and private companies. The recent data reflecting the sharp drop in official Chinese GDP growth statistics reflect a major slowing down of the Chinese economy.
Unlike the economic crisis of 2008. when the United Sates was the primary trigger, the next major global recession will most likely be unleashed by events in China, now the world’s second largest economy.
The director of the International Monetary Fund, Christine Lagarde, sounds very worried, while engaging in contradictory messaging in her speech before the Brookings Institution. On the one hand, she mimics what Fed Chairman Ben Bernanke did two years ago with his talk of “green shoots.” Lagarde speaks of the U.S. economy showing glimmers of positive data, while acknowledging, in her own words, that, “Only a few months ago, we seemed to be staring into the abyss.” She urges the advanced economies to take advantage of the glimmer of “good news” to invest in growth and more bailouts for the financial sector, while also warning about the sovereign debt crisis afflicting the Eurozone.
“Clearly, the risk that looms largest is that sovereign and financial stresses return with renewed force in Europe,” Christine Lagarde told the Brookings Institution. But what solutions does the IMF have to offer? Borrow more to recapitalize banks that made the wrong bet on risky loans while simultaneously boosting government deficit spending to “stimulate growth?” Or, cutting back on government spending, thus creating a fiscal drag that leads to negative growth without reducing deficits? The IMF and its leader, just like the politicians of the advanced economies, have run out of solutions, other than meaningless cliches.
The International Monetary Fund’s boss, Christine Lagarde, has issued another warning regarding the global economic crisis. This time, she spoke in Washington DC about the danger of another Great Depression unless all countries work together to resolve the Eurozone sovereign debt crisis. If they don’t act in unison and effectively, Lagarde said the consequences would be, “Protectionism, isolation, and other elements reminiscent of the 1930s Depression.”
The grim outlook from the IMF is in sequence with cascading warnings from France and Germany that unless fiscal policy in the Eurozone becomes “harmonized” (e.g. more erosion of national sovereignty) and other countries outside the Eurozone (especially China) provide funding for the “big bazooka” to backstop the danger of sovereigns becoming insolvent, the global economy will implode. What the IMF and the politicians have not said is that it is politically impossible for them to obtain all the scenarios they claim are needed to prevent outright catastrophe.
Officer Larry of the NYPD is on his way to Zuccotti Park in lower Manhattan to arrest peaceful protesters involved with the Occupy Wall Street movement. Being a public spirited member of the New York Police Department, Officer Larry does remind us that there is a global economic crisis underway that rivals the Great Depression of the 1930s.
The global economic crisis that erupted in 2008, and was supposedly “cured” by the massive public debts incurred by the policymakers, is apparently evolving into a terminal tailspin. A growing number of reputable economists, including Nouriel Roubini, are frankly stating that advanced economies, in particular the United States, the Eurozone countries and the United Kingdom, have entered a double-dip recession. The economic outlook is so bleak that even establishment institutions such as the International Monetary Fund, and to a lesser extent the U.S. Federal Reserve, are candidly acknowledging the dire state of the global economy and the precariousness of its financial architecture. Fed Chairman Ben Bernanke was forced prematurely to hint at some level of policy intervention; the result, the so-called “Operation Twist,” a macabre arrangement whereby the Federal Reserve’s short-term purchases of U.S. Treasuries are swapped for long-term government debt instruments. The resulting plunge in equity values demonstrates that the market is no longer easily fooled by Bernanke and his clowns.
In a starkly candid statement, the new managing director of the IMF said that the world’s economy was entering a “dangerous place.” Given that the leaders of major global economic bodies do not seek to erode market confidence during turbulent economic times, it must be surmised that Christine Lagarde would not have issued such a pronouncement as the leader of the IMF unless the data she is privy to shows that things are actually much worse than what is being publicly discussed.
Will my prediction of economic catastrophe in 2012 hold true? Based on current developments and increasingly grim talk by economists and policymakers such as the IMF’s managing director, I think the chances that I am wrong are weaker than the likelihood that my forecast is correct.
The International Monetary Fund, as predicted in a recent post, will need to find a new managing director, following the arrest and indictment of Dominique Strauss-Kahn over allegations of sexual assault involving a maid at a Manhattan hotel. With Europe engulfed in a full-blown sovereign debt crisis, and the IMF viewed increasingly as the lender of last resort for the insolvent PIGGS nations on the periphery of the European monetary union, a vacancy at the top of the International Monetary Fund adds further to already elevated levels of market uncertainty.
Among the names being floated for new head of the IMF is the finance minister of France, Christine Lagarde. Her name has been surfaced by a strong faction within the IMF which believes its head must remain a European, just as the leader of the World Bank is traditionally an American. In any event, whoever is the new leader of the IMF, he or she will head a pivotal backstop to the unraveling of the global financial system and economy that has been severely weakened and tarnished by a scandal that is an allegory for all the ills of the current global economic system.
