April 8, 2013
Is it just me or do you also think there is something strange about the IMF writing reports criticising itself and trying to pass it off as objective commentary? Last week we saw the IMF, one leg of the troika’s rickety three-legged stool, saying that the Irish economy was not performing well under the policy that it, the IMF, was implementing. It stated that the level of unemployment was staggering. What is actually staggering is that they should be staggered – because this high level of unemployment is the result of IMF policy here.
The IMF’s indignation is a bit like the HSE issuing a report criticising the health service and stating it is staggered by queues at A&E.
This absurdist approach (in the sense that it amounts to nothing) to responsibility is made more, dare I say, absurdist by some sections of the media. For example, I was listening to RTE’s Morning Ireland programme where, quite seriously, the interviewers were taking this “report” at face value, asking other experts whether they “agreed with the IMF” rather than asking the obvious question, which is “does the “IMF agree with the IMF”?
It is Mr Beckett, Mr Camus and Ms Lagarde all wrapped into one.
Just so we make no mistake: the IMF is making policy in Ireland. The consequences – higher unemployment, lower growth and a shrinking domestic economy – are the direct result of these IMF policies. If the IMF is worried about the consequences of its own policy then shouldn’t it change it?
Part of me thinks that the IMF has realised that the entire thrust of its economic intervention in Ireland and Europe is unravelling and it is trying to mendaciously lay the groundwork for a tactical intellectual retreat. When it finally abandons its austerity folly it will point to these flimsy reports to claim: “look we were sceptical all along”. If you are shocked by my cynicism just remember that the iron rule of a bureaucracy or an organisation is to perpetuate itself and its power.
Therefore, the key thing for an organisation is to extend its prestige. Somewhere in this orgy of self-preservation the truth gets lost and the story changes to suit the new times.
So, with the IMF, last year’s conventional wisdom “austerity works” becomes, on the back of evidence that maybe this is not true, “austerity doesn’t always work”. This shifting position is a prelude for “austerity only works in certain conditions” and then we will have the complete volte-face. Yesterday’s conventional wisdom and hard-held positions become tomorrow’s folly.
With regard to conventional wisdom, we would be wise to remember the great American economist Galbraith who pointed out that conventional wisdom is rarely defeated by some brilliant countervailing idea which convinces people to change their views, but by the march of events.
In the IMF’s case, the events are the facts, which could have been pointed out by a Leaving Cert economics student: austerity doesn’t work when the banks are broken, interest rates are already low and the debt overhang is enormous.
For years this column has been arguing that we face what is termed a balance sheet recession where debts are so big that the balance sheets of the middle classes are ruined. On one side of the balance sheet there are assets, which have collapsed in value. Yet on the other side are liabilities or debts which are rising, thus the net worth of the middle classes has evaporated.
This means people save what they have. This bears down on the spending and therefore retail sales fall. Up until now the IMF and its pantomime sister the European Commission dismissed these balance sheet recession notions, preferring instead to peddle the notion that the recession was a function of too much government spending. In fact the opposite is the case – the explosion of government spending is the consequence, not the cause of the recession.
Check out the Pauline conversion of the IMF. This is what it is saying now, in a shameless arse-covering exercise. “Household debt remains high, curtailing consumption, and financial distress affects many households. The halving of house prices from their peak has driven a 38 per cent fall in household net worth, the largest fall in the EU.
“Households have responded by increasing their savings rate to about 12 per cent of gross disposable income, from pre-crisis levels below 8 per cent, with about three-quarters of saving used for debt reduction during 2010-12.”
So what do you think happens when savings rise by 4 per cent of GDP? Well clearly consumption falls by the same 4 per cent. And what happens when consumption falls 4 per cent? Well obviously income falls because when you think about it, your spending is my income and vice versa. If you stop spending, I am not earning and if I am not earning, I am not spending and you are not earning, so your income falls. And as income falls, debt burdens rise relative to income even if debts stay the same in absolute terms.
So here’s what the IMF is saying now. Surprise, surprise.
“Debt burdens of many households are much higher, and mortgage arrears over 90 days continue to mount, reaching 15.8 per cent of the total value of mortgages on principal dwellings and 26.9 per cent of buy-to-let mortgages by the end of 2012.”
Oh Lord what revelations! You seriously mean Mr IMF, that when incomes fall there will be debt problems? Wow! How many PhDs did you need to figure that out? Now who do you think will be most affected by the lack of domestic spending? Will it be the multinationals which we welcome but which employ relatively few people to whom the government constantly genuflects or the small businesses that employ the vast majority of us?
Of course it will be the small business sector, which accounts for about half of gross value added and 72 per cent of employment. So the IMF is now beginning to see what its policies are doing. The implication of the slump in growth is that the banks are now in danger of needing another bailout.
Now, if they need another bailout, where will the capital come from? This is where Cyprus comes in. What if the capital needs to be raised from depositors? Are we safe then?
The starting point from the EU is that the Cypriot deal was the “template”. Then the EU backtracked and stated it was a special case. I am not too sure which statement to believe.
However, given the way the IMF has changed its stance, a U-turn from the EU on deposits can’t be out of the question.