17th April 2012 by Shaun Richards
Sometimes the news we receive is hard to believe and at other times it goes further and becomes like an episode from the science-fiction series the Outer Limits. Today it is the latter which has come to the forefront as Japan’s Finance Minister has announced that she will provide some US $60 billion of loans to the International Monetary Fund. The Managing Director of the IMF is very pleased with this development although she has this year told us that her organisation needs US $600 billion or US $500 billion and more recently US $400 billion so we should not put too much emphasis on her. Indeed her lower estimate coincided with the crisis in the Euro building again!
Er doesn’t Japan have an enormous national debt?
It seems appropriate to use IMF analysis to look at Japan’s situation and from November here is its view.
Public debt is on an unsustainable path, carrying risks to domestic and global stability.
Can anybody see a weakness in adding some US $60 billion to something that is on an “unsustainable path”? According to the IMF the gross national debt of Japan is around 225% of her economic output as measured by her GDP (Gross Domestic Product). And the outlook is for this to get even worse as Japan continues to run high fiscal deficits.
Fiscal imbalances are projected to remain large going forward
Indeed with the reconstruction efforts after the Fukushima nuclear problem and the tsunami the IMF expects Japan’s net national debt to surge too.
Following the global financial crisis and
the March 2011 earthquake, staff projects
that a near-term decline in GDP and
reconstruction efforts will push the net
public debt ratio to 160 percent by 2015.
The IMF does have a prescription for this solution.
Japan needs both fiscal adjustment and structural reform
Or we may see.
Should Japanese Government Bond yields rise from current levels, Japanese debt could quickly become unsustainable.
As you can see the IMF prescription for Japan is to cut back its public spending and raise taxes (particularly its consumption tax) to reduce its fiscal deficit so that its national debt does not balloon any further. However this has not stopped the IMF from holding out a begging bowl and then taking US $60 billion in loans from her. The hypocrisy and indeed cronyism going on here is shameful.
But then if you let politician’s have a grip om what they consider to be “free money”…From my update of the 19th of January.
A False Premise or a politician’s fantasy
This is from a research paper from the US Congress Research Board and the emphasis is mine.
In 1967, a Presidential Commission on Budget Concepts recommended that U.S. payments to the IMF should not be treated as budget outlay but rather they should be counted as an exchange of assets which is matched by transfers of equivalent value to the United States from the IMF. Since that time, payments to the IMF have been deemed to have no impact on the Federal budget or on the Federal budget deficit.
A politician’s dream is it not? Expenditure does not count because there is a corresponding transfer of assets of equivalent value! So the recent lending to Portugal, Ireland and particularly Greece has seen assets of “equivalent value” transferred? Plainly this is an utter misrepresentation.
I have used the United States as an example but the (ill) logic of treatment of IMF contributions is quite general and includes the UK.
So we are likely to see a short-term improvement in the situation in the Euro crisis as Japan is unlikely to have promised this money without believing that others will join her. We can expect to see the hype-ometer ratcheted a notch higher. But this is in many ways another type of alchemy as I have explained above where money is magicked out of nowhere at apparently no cost and we know where that tends to lead.
The IMF is lending in ever more risky situations as the likelihood of Greece and these days Portugal repaying their debts to her looks ever lower. Sooner or later markets will worry about IMF loans not being repaid. Then losses will clash with official account entries and balance sheets where the money does not exist!
The larger the size of loans that the IMF makes to Euro countries the larger the risk of this scenario playing out. It is an irony on a day where the media are majoring on a new US leader of the World Bank (12 in a row now I believe) and ignoring the much more important institutional capture of the IMF by Europe and in particular by France.
Mind you the often outspoken Brazilian government (remember “currency wars”) is on the case.
The euro countries abuse their power in the IMF
Inflation trends continue to disappoint
We have seen inflation come in disappointingly in both the UK and in the Euro zone today.
UK CPI annual inflation stands at 3.5 per cent in March 2012, up from 3.4 per cent in February
Euro area annual inflation was 2.7% in March 2012, unchanged compared with February
In case you are wondering why I am calling an unchanged inflation number in Europe disappointing it is because the flash estimate was at 2.6%. Continuing a theme you have to look right at the bottom of the report for such bad news.
Real wages in the UK continue their fall
For once the two UK inflation indices are quite close with CPI at 3.5% and our old target of RPIX at 3.7%. Let us compare them with rises in wages.
Total pay (including bonuses) rose by 1.4 per cent on a year earlier, down 0.5 on the three months to December 2011
So if you take our official inflation measure we see that real wages are falling at an annual rate of just over 2%. Even worse nominal wages have been falling as inflation has ticked higher which means that future numbers need to be watched closely. We already have a problem which I believe has undermined the Bank of England’s strategy of easy money and we do not want it to get worse.
I feel that this means that this report by David Smith of the Sunday Times is unlikely to happen.
Consumers start to get back into their stride
Indeed perhaps he is already shifting his ground as today he says
The fall in both measures of inflation is essential if the growth in real incomes is to be restored, thus supporting spending
Inflation is supposed to be falling
The media bought the Bank of England line that inflation was on its way to the 2% target this summer hook line and sinker but yet again we see that we have a “surprise”. There still are inflationary issues out there and one of them was highlighted by our producer price numbers from Friday.
Between February and March the total input price index rose 1.9 per cent
And as we mull the fact that this eventually feeds into a consumer inflation measure that is supposed to rise at 2% per year and not 2% a month we see this too.
Between February and March the output index for home sales of manufactured products rose 0.6 per cent
So we can see that there remains pressure in the inflation chain. At this time I think that we should remind ourselves that this is out of kilter with the weak economic recovery we are experiencing. Indeed when the next economic output numbers are received there is still some doubt that they will show a recovery.
Also the argument that our inflation was driven by tax rises can now disappear as if we look at our inflation measures which cover this the direct measure CPIY is also at 3.5%. So I guess it will no longer be name-checked in Adam Posen’s speeches.
More problems for Adam Posen
From last September.
I don’t really see the inflation threat. If inflation were to get bad it’s pretty easy for us to take it down.
Apparently not that easy Adam!
The Governor of the Bank of England stumbles too
Back on the 2nd of March 2011 Mervyn King told us this.
The projections that we published in the inflation report a couple of weeks ago have the characteristic that the inflationary pressures are pretty much back to target by around the middle of this year.