Wednesday, 4 December 2019

Why the IMF was so hesitant about stimulus during the recent recession.

As others have noted, the IMF was positively schizophrenic on the subject of stimulus during the recession that started in 2007/8. In one breath they backed stimulus, while in the next, they warned of the dangers of the alleged increased debt that governments incur when they implement stimulus.

The first obvious flaw in the latter “debt” point is that to a large extent, governments just didn't incur more debt when they implemented stimulus! To be more exact, in the first instance they incurred more debt, but then their central banks did large amounts of QE: i.e. they printed money and bought back that debt.

Thus in effect what many governments did (assisted by their central banks) was simply print money and spend it (and/or cut taxes).

Yet strange to relate, the recently retired chief IMF economist, Olivier Blanchard claims here that low interest rates facilitate fiscal stimulus. His actual words: “…..low interest rates increase the room to use fiscal policy.” (See p.4). (Article title: “Interview with Olivier Blanchard”, published by Goldman Sachs).

To repeat, the going rate of interest has absolutely no bearing on the ease with which government can implement fiscal stimulus because (to repeat) governments and central banks between them can fund fiscal stimulus by simply printing money!!!!!

Keynes pointed out in the early 1930s that stimulus can be funded simply by printing money. You’d think his message would have got thru by now, wouldn’t you?

As Claude Hillinger put it in his paper entitled “The Crisis and Beyond: Thinking Outside the Box”:

“An aspect of the crisis discussions that has irritated me the most is the implicit, or explicit claim that there is no alternative to governmental borrowing to finance the deficits incurred for stabilization purposes. It baffles me how such nonsense can be so universally accepted. Of course, there is a much better alternative: to finance the deficits with fresh money.”

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