IMF chief Christine Lagarde is worried that public finances around the world threaten to undermine the global recovery.
Despite deteriorating finances, the IMF urges strong countries to spend more and the weaker ones to cut budgets less.
The US allegedly has “strong finances”.
Before we get into US finances, please consider IMF Fears Worsening Public Finances Threaten the Recovery.
Public finances across the world are deteriorating, threatening to undermine the global recovery, the International Monetary Fund warned on Wednesday.
Urging nations to find a “comprehensive policy package” to improve growth and public finances, the fund said action was urgently needed to reduce vulnerabilities in the global economy it has been highlighting in Washington this week.
In its twice-yearly fiscal monitor, the fund’s assessment of public finances across the world, the IMF said that the fiscal positions of most of the world have deteriorated with many previously identified risks such as lower growth and higher debt now a reality in both rich and poor countries.
High debt, low inflation and low growth have added to fiscal pressures in advanced economies, increasing the burden of public debt compared with previous forecasts. As a result, the ratio of debt to national income — currently 107.6 per cent of national income — is now only expected to begin to decline in 2017.
[Mish comment: expect massive revisions to the IMF’s forecast improvement between now and 2017]
The IMF endorses a “horses for courses” approach to dealing with growing stresses on public finances and highlights the urgent need to improve sustainable growth and inflation rates as the best way of creating stable public finances in the medium term.
The fund also urged governments of advanced economies to do everything to make their fiscal policies as supportive of growth as possible, even if they were engaged in an austerity drive. It called on countries with strong public finances, such as the US and Germany, to increase investment to raise growth now, while also putting in place a medium term plan to reassure financial markets that spending would not get out of hand.
Spend More Now, Worry About Medium Term Later
USA Fiscally Strong
Like you, I was pleased to learn of the improving US fiscal condition.
Since the IMF always has its facts in order, I almost did not bother looking this one up.
But I did, and I was stunned to discover this Bloomberg report from January 2016: CBO’s Budget-Deficit Projection Widened on Lower Tax Revenue.
The Congressional Budget Office projected a wider deficit for this fiscal year and bigger gaps in the coming years, after lawmakers approved about $680 billion in revived tax breaks over the next 10 years.
The CBO is forecasting a budget gap of $544 billion this year, according to a report released Tuesday in Washington. That compares with a $414 billion deficit projected in August, and the 2015 deficit of $439 billion.
“If current laws generally remained unchanged, the deficit would grow over the next 10 years, and by 2026 it would be considerably larger than its average over the past 50 years,” the office said.
Because I was positive the IMF was right and the above article wrong, I went digging into the CBO Report only to discover things appear more dire than Bloomberg reports.
CBO anticipates that mandatory outlays will be $168 billion higher in 2016 than they were last year. A significant component of that growth is Social Security outlays, which are expected to increase by about $28 billion (or 3 percent) – a percentage that is smaller than last year’s, primarily because beneficiaries did not receive a cost-of-living adjustment in 2016 but did receive one in 2015. Nevertheless, because the program is so large, even that smaller-than-average increase accounts for one-sixth of the growth in mandatory spending for 2016.
- What happens if the Fed gets the inflation it wants?
- What happens if there is a recession?
- What happens if both the above happens?
Wait a second. Forget those questions. I figured out the IMF’s brilliant plan.
IMF’s Brilliant Solution
- Spend more now
- Worry about the medium term later
- Ignore the long term
The IMF’s brilliant plan is guaranteed to work because the medium term eventually becomes the short term and we never have to worry about the long term.
It’s that kind of thinking that gets you the big bucks.
Lagarde’s brilliance is precisely why she gets paid $550,000 annually in salary and expense money tax free while the rest of us pay taxes.
Besides, it’s not evasion if it’s part of the deal. You just have to be in the club to get deals like that.
How does one get in the club? With brilliant thinking as I outlined above.
Mike “Mish” Shedlock