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IMF Warns Over US Housing, Unemployment, Consumer And Strong Dollar Risks

Tyler Durden's picture


The IMF has issued a less than stellar outlook of the US economy after consultations with US government authorities, in which it cautions that even as the outlook has generally improved, major downside risks remain: "On the downside, the backlog of foreclosures and high levels of negative equity, combined with elevated unemployment, pose risks of a double dip in housing; the continued deterioration in commercial real estate poses risks for smaller banks; and financing conditions remain tight, especially for smaller firms reliant on bank finance. Most recently, and tipping the balance of risks to the downside, sovereign strains in Europe have become an increasing concern, potentially impacting the United States through financial market and, in a tail risk scenario, trade links." Also notable is the fund's warning on the state of the US consumer and the perceived overvaluation of the dollar: "It follows, as also emphasized in last year’s Article IV, that the United States can no longer play the role of global consumer of last resort, underscoring the importance of measures to boost growth and demand in current account surplus countries. With the U.S. dollar now moderately overvalued from a medium term perspective, this will need to be accompanied by greater exchange rate flexibility/appreciation elsewhere."

Full report:

Thanks to a powerful and effective policy response, the
recovery from the Great Recession has become increasingly well
Since mid-2009, massive macroeconomic stimulus and
the turn in the inventory cycle have overcome prevailing balance sheet
strains, and—aided by steadily improving financial conditions—autonomous
private demand has also started to gain ground. While still modest by
historical standards, the recovery has proved stronger than we had
earlier expected, owing much to the authorities’ strong and effective
macroeconomic response, as well as the substantial progress made in
stabilizing the financial system. Important steps have also been taken
to sustain growth and stability over the medium term, including through
landmark health-care legislation and, as noted in the FSAP assessment
(see attached box), significant progress toward reform of financial

The outlook has improved in tandem with the recovery, but
remaining household and financial balance sheet weaknesses—along with
elevated unemployment—are likely to continue to restrain private
We forecast GDP growth of 3¼ percent in 2010 and
about 3 percent in 2011, with inflation very low, and unemployment
remaining above 9 percent. On the upside, consumption could outperform
expectations, if confidence and employment improve faster than expected;
more generally, the level of activity in a number of sectors is
extraordinarily subdued and could return to normal levels faster than
expected. On the downside, the backlog of foreclosures and high levels
of negative equity, combined with elevated unemployment, pose risks of a
double dip in housing; the continued deterioration in commercial real
estate poses risks for smaller banks; and financing conditions remain
tight, especially for smaller firms reliant on bank finance. Most
recently, and tipping the balance of risks to the downside, sovereign
strains in Europe have become an increasing concern, potentially
impacting the United States through financial market and, in a tail risk
scenario, trade links.


States: Medium-Term Outlook
(Percent change, unless otherwise noted)

  2010 2011 2012 2013 2014 2015

Real GDP

3.3 2.9 2.8 2.8 2.6 2.6

Consumer prices

1.6 1.1 1.5 1.7 1.8 2.0

Unemployment rate 1/

9.7 9.2 8.4 7.6 6.9 6.3

Current account 2/

-3.2 -3.4 -3.5 -3.6 -3.7 -3.6

Source: Fund staff estimates
1/ Percent of labor force.
2/ Percent of GDP.

On the macroeconomic side, the central challenge is to
develop a credible fiscal strategy to ensure that public debt is put—and
is seen to be put—on a sustainable path without putting the recovery in
Since 2007, the debt held by the public has almost
doubled to 64 percent of GDP—the highest level since 1950—and under
current policies could reach 95 percent of GDP by 2020. Thereafter, as
the impact of the aging population and rising health care costs is
increasingly felt, debt will rise further to over 135 percent of GDP by
2030 and continue to increase thereafter. In this connection, the
health-care reform provides a welcome basis for cost control, but
initial savings will be modest and will hinge on the implementation of
many measures. Given the uncertainty whether new policy measures will
mitigate health care costs, the Independent Payments Advisory Board will
play a key role in monitoring and remediating excess cost growth. If
excess cost growth persists, consideration should be given to other
measures such as reducing tax exemptions for employer health insurance


Fiscal Projections for Federal Government (Current Policies)
(percent of GDP, Fiscal Years)

  2010 2011 2012 2015 2020

Federal budget balance 1/

-11.0 -8.1 -5.3 -5.6 -7.3

Federal primary balance 1/

-9.8 -6.7 -3.4 -2.0 -2.3

Structural primary balance 2/

-7.6 -5.4 -2.5 -1.8 -2.3

Federal debt held by public

64.0 69.0 72.4 80.4 96.3

Source: IMF staff estimates.
1/ Deficit estimates are adjusted for NPV costs of financial sector
2/ Excludes net interest, cyclical effects, and costs of financial
sector support.

The authorities’ commitment to halve the budget deficit by
2013, and intention to stabilize public debt at just over 70 percent of
GDP by 2015 are welcome, although much remains to be done to achieve
these aims.
Given that we use less optimistic economic
assumptions than the Administration, we see the need for a more
ambitious adjustment to stabilize debt than that envisioned by the
authorities—in particular, a federal primary surplus of about ¾ percent
of GDP by 2015, larger than the primary balance target given to the
Fiscal Commission. This in turn will require an underlying fiscal
adjustment (excluding the normal cyclical rebound) of about 8 percent of
GDP during that period, some 2¾ percent of GDP more than in the
Administration’s plans. Part of this adjustment could be achieved
through expenditure reductions—and the Administration’s intention to
freeze non-security discretionary spending is welcome. However, measures
to increase revenues will also be needed, which the mission believes
could include further base broadening via cuts in deductions,
particularly for mortgage interest; higher taxes on energy; a national
consumption tax; or a financial activities tax (which could also
mitigate systemic risks). Looking beyond 2015, the aim should be to put
public debt firmly on a downward path to rebuild the room for fiscal
maneuver (especially given the risks from large funding shortfalls in
state and local government pension and health schemes).

The timing and composition of the adjustment will need to be
carefully designed to minimize the impact on demand while ensuring
In this connection, a credible fiscal plan could
have three basic elements. First, an upfront adjustment beginning in
FY2011; in current circumstances, we believe that the 2 percent
reduction in the structural deficit proposed in the FY2011 budget is
broadly appropriate. This should be accompanied by, second, a clear
commitment to the further measures needed over coming years, for
instance through enshrining targets and/or measures in legislation; and
third, further measures to address entitlement pressures, notably
imbalances in Social Security, where the needed policies are well known.
Immediate measures should be designed to have the smallest impact on
demand (for example, reduction of exemptions for high-income
households). There could also be scope for tradeoffs among the three
elements if necessary, for example, in the event downside risks were to
materialize: for instance, if there were to be a consensus for
substantive entitlement reform—which would likely have little impact on
demand—immediate actions could be more backloaded.

In the interim, additional measures being considered in the
Congress to support activity should be carefully targeted within the
framework laid out in the FY2011 budget, and to the maximum extent
possible, offset in future years.
In this connection, the risk
of rising structural unemployment, in light of persistent skills and
geographic mismatches (the latter aggravated by underwater mortgages)
and high unemployment spells, could merit support for job search and
employment. As unemployment declines, a gradual shift from expanded
support for the unemployed to targeted measures such as credits for
hiring could encourage job creation and job search, while mitigating the
risks that protracted unemployment support erodes job skills and boosts
structural unemployment (as with existing unemployment insurance
extensions, support could be calibrated to regional labor-market
conditions). In addition, further support for foreclosure mitigation
under the existing framework may be needed if the housing market were to
weaken. In a worse-case scenario, there may be a case for reconsidering
introducing cramdown procedures. To maintain consistency with long-term
fiscal stability, any such targeted measures should be self-liquidating
as housing and labor market strains improve, and offset with future
tightening under binding pay-as-you-go provisions.

Turning to monetary policy, the Federal Reserve has deftly
managed the tradeoff between near-term support and medium-term
It has appropriately maintained an extraordinarily
low level of policy rates and signaled its intention to maintain them
for an extended period, supporting economic and financial stability. And
at the same time, it has wound down almost all of its emergency
facilities and ended a very substantive asset purchase program, with
very little adverse impact on markets, aided by careful and effective
communication. For the near term, with inflation very low, we believe
that maintaining the present high level of accommodation is appropriate
to hedge deflation risks and help to counteract the forthcoming fiscal
drag on economic activity, while also supporting financial conditions.

Looking further ahead, the Fed is well placed to manage the
uncertainty of the monetary exit
. These include the heightened
uncertainties surrounding the effects of monetary operations on the fed
funds rate, the desirable level of reserves consistent with a more
normal operating mode, and the efficacy of tools recently adopted. Its
well-diversified toolkit—including interest on reserves, reverse repos,
and term deposits—seem well-suited to managing the monetary exit while
navigating smoothly these remaining uncertainties. In addition, it has
credibly communicated its commitment to sustaining appropriately
accommodative monetary conditions even as it has introduced tools to
prepare for the later exit. Continued clear communication about its
strategy and operations will be essential as the exit evolves,
particularly if it needs to sell assets at some later stage.

Considerable progress has been made in restoring financial
stability, as emphasized in the recent FSAP assessment, but important
risks remain.
While risk-based capital ratios have rebounded to
around historical averages, this partly reflects a shift into less
risky assets (which will reverse when lending expands). Looking forward,
more capital will be needed to support additional bank lending if
securitization does not pick up as expected, and to accommodate the
higher expected capital standards. More generally, as shown in FSAP
stress tests, important parts of the banking system remain vulnerable to
shocks. A recent Fed survey shows increased use of loan extensions to
commercial real estate borrowers, amid widespread concerns about
weaknesses in the sector, as well as concerns about whether banks have
adequately addressed the risks in underwater mortgages. Against this
background, it will be important that banks adequately recognize the
risks on their balance sheets, and have sufficient capital to support
the ongoing recovery.

As highlighted in the FSAP exercise, much needs to be done to
reform supervision and regulation to address the gaps exposed by the
The legislation under consideration in Congress would
make major steps in this direction, including creating an interagency
council (the “FSOC”) to identify and act upon emerging risks to
financial stability, strengthening the resolution framework for systemic
institutions, imposing tougher capital and liquidity requirements
(especially for systemic firms), and containing systemic risks in
derivatives markets while improving transparency. That said, existing
legislative proposals miss the opportunity to significantly reduce the
number of supervisory agencies, which leaves a heavy burden on relevant
agencies to cooperate effectively and avoid supervisory gaps and

Strong implementation of all these steps will be key.
The FSOC will need to quickly develop a common macro prudential focus,
and a culture of transparency and cutting-edge thinking on financial
stability issues. To this end, regular broad based stress test
exercises—along the lines of the SCAP—and publication of periodic
financial stability reports that include stress tests and identify
financial stability risks in a forward looking fashion would be helpful.
Regulation of systemic institutions should be tight enough to
disincentivize systemic size and complexity, so as to offset moral
hazard and the externality of systemic risk. Accordingly, we see strong
roles for both the Treasury and the Fed in the FSOC, with the Fed
building on its work in the SCAP exercise to integrate macroeconomic and
financial analysis. “Living wills” should be rigorously vetted and
updated frequently, and an institution should be streamlined if its will
cannot be implemented in a crisis. Finally, we support the aim to
improve transparency and contain counterparty risks in OTC derivatives.

A key challenge will be to revitalize private securitization,
to supplement bank credit.
Draft legislation appropriately
emphasizes a return to “safe securitization” via greater oversight and
accountability for ratings agencies, increased transparency, emphasis on
investor due diligence, and “skin in the game” for originators to
strengthen incentives for prudent asset vetting and structuring. Given
the large role that securitization played in the past, and the potential
limits to bank balance sheets for creating credit, speedy
implementation of these measures would be essential to avoid limits on
credit supply that could crimp the recovery. It will also be important
to coordinate reforms domestically and internationally to ensure safe
securitization and promote a level playing field.

A key area of unfinished business is the reform of the
housing system.
The current system is costly, inefficient and
complex, with numerous subsidies that do not seem to translate into a
sustainably higher homeownership rate. In this connection, we welcome
the ongoing review of the housing finance system, and we attach
particular importance to the review of tax expenditures (which are both
sizeable and largely benefit the better-off). In addition, the ambiguous
precrisis public/private status of the GSEs proved unsustainable. The
GSE’s mandates should be streamlined and their retained portfolios
should be privatized, as they have been the source of past losses and
are unrelated to their core bundling and guarantee business lines. Those
lines, which arguably provide public goods, should be made explicitly

A multilateral approach to economic policy management will be
as important in the recovery as it was in the crisis.
welcome the authorities’ leading role in multilateral fora, as well as
their efforts to promote international stability (most recently through
the Fed’s redeployment of its swap lines). For the medium term, the key
contribution that the United States can make to global growth and
stability, consistent with the G-20 Mutual Assessment Process, is
through raising domestic savings—particularly through fiscal
consolidation—to ensure that the current account deficit remains within
bounds; and restoring and strengthening its financial sector. It
follows, as also emphasized in last year’s Article IV, that the United
States can no longer play the role of global consumer of last resort,
underscoring the importance of measures to boost growth and demand in
current account surplus countries. With the U.S. dollar now moderately
overvalued from a medium term perspective, this will need to be
accompanied by greater exchange rate flexibility/appreciation elsewhere.

Finally, we welcome the limited recourse to protectionist
Indeed, the President’s goal of doubling exports over
five years—while ambitious in quantitative terms—sends an important and
appropriate signal of the need to increase, rather than reduce,
openness. In this connection, we encourage the authorities, in
conjunction with other countries, to redouble their efforts to conclude
the Doha Round, which will bring increased and more secure market
access, promoting U.S. and global exports.


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Thu, 07/08/2010 - 10:09 | 458191 Teaser
Teaser's picture

Funny how the headlines at MSM news sites say things like "IMF sees US in solid recovery"

Thu, 07/08/2010 - 10:09 | 458195 Sqworl
Sqworl's picture

Finally they decide to reveal our "Chimerica" moment!!!

Thu, 07/08/2010 - 10:13 | 458203 HarryWanger
HarryWanger's picture

Pretty much all the retailers missed SSS expectations with gloomier forecasts. I would love to see this "rally" run right into a brick wall around 1100 then a serious leg down. Of course, it may not make it to 1100 but that would definitely be a sweet spot.

Thu, 07/08/2010 - 10:14 | 458207 dpr10
dpr10's picture

the IMF is a joke..Their US GDP growth expectation for 2010 and 2011 is higher than that of GS and despite all these concerns, the US economy will chug along::)))

Thu, 07/08/2010 - 10:25 | 458237 anarchitect
anarchitect's picture

"The IMF has issued a less than stellar outlook of the US economy after consultations with US government authorities..."

You have to wonder how much worse the outlook would have been without these "consultations" and how many countries have the IMF consulting their "authorities" before issuing economic outlooks.

Thu, 07/08/2010 - 10:55 | 458257 Cognitive Dissonance
Cognitive Dissonance's picture

Any announcements from the IMF should be given as much credence as one would give to The Godfather assuring you that you have nothing to worry about. The IMF is the economic enforcement arm of "The Family", whose headquarters is the BIS. 

Anything said by the IMF should be considered in that light.

The game is derivatives and the following BIS statistics says it all. Total notional amount outstanding on Dec 2009 was $614 Trillion.

Thu, 07/08/2010 - 22:08 | 459816 nuinut
nuinut's picture

Cognitive Dissonance said:

The IMF is the economic enforcement arm of "The Family", whose headquarters is the BIS. 

How did you arrive at that conclusion?

This statement is at complete odds with my understanding of both the IMF and the BIS.

Thu, 07/08/2010 - 10:37 | 458262 Scooby Dooby Doo
Scooby Dooby Doo's picture

Unfortunate for some, our slaves are being discovered and freed. This will add additional downward pressure on the economy as the slaves dilute the job market.

Thu, 07/08/2010 - 10:41 | 458269 ATTILA THE WIMP

Dominique Strauss-Kahn

IMF Chairman


Thu, 07/08/2010 - 11:08 | 458332 litoralkey
litoralkey's picture

Dominique Strauss-Kahn and the IMF are scum, however, you got to use better sources than the English language agitiation media of Chechen mass murderers to make your point.

Remember Beslan.

Thu, 07/08/2010 - 17:19 | 459270 zaknick
zaknick's picture

Dominique Strauss-Kahn

IMF Chairman




How is this junk? It's frigging true. Bilderberger, CFR, Trilateral etc  all scum who think they own this planet and everybody in it. Who the hell do you think Obama really answers to? These scum.

Thu, 07/08/2010 - 18:37 | 459472 Nikki
Nikki's picture

Another Zionist member of the kosher nostra ?...

There is no cabal.
There is no conspiracy.
I am an anti-Semite loon.

Thu, 07/08/2010 - 10:41 | 458270 Crab Cake
Crab Cake's picture


So the IMF sees a problem with the US housing market? 

I don't think we have anything to worry about though, all of those assets are marked at true value, the banks and investors are solid money good; right?

Let me guess they're worried about unemployment now that the masses are being cut loose to fend for themselves?  Am I too far from the mark?

Damn the IMF, curse it to hell, it's an institution of extra-national enslavement. 

Thu, 07/08/2010 - 10:42 | 458273 bugs_
bugs_'s picture

End the IMF.

Thu, 07/08/2010 - 10:43 | 458274 boeing747
boeing747's picture

I posted a comment here at least one month earlier "strong dollar, beware of weak economic ahead". "Strong dollar helps bond sales but hurt productions and make our debts heavier".  Very soon dollar will drop like a rock by 'design'. Stop playing currency game and get back to work, that's only honest way out of this depression.

Thu, 07/08/2010 - 10:59 | 458308 doublethink
doublethink's picture


The IMF Is A Thief


Milton Friedman's theory of floating exchange rates, on which the international monetary system has been based since 1971, has given rise to a coercive regime in the sense that International Monetary Fund (IMF) statutes forbid member countries from stabilizing the value of their currencies. A country attempting to do that is branded "a currency

manipulator" and is threatened with trade sanctions.

The prohibition is understandable. It is designed to protect the scheme whereby the US dollar balances of the surplus countries are stealthily embezzled. It works as follows


Thu, 07/08/2010 - 13:27 | 458628 traderjoe
traderjoe's picture

No, they'll simply send in their keys to BAC, JPM and rent down the street for 50% less. And yes, that will happen. 

Thu, 07/08/2010 - 11:04 | 458325 litoralkey
litoralkey's picture

That the IMF is intellectually lazy enough to use the term "double dip recession" shows just how pathetically run the current international financial system is run.


How Long Is the Coast of Britain? Statistical Self-Similarity and Fractional Dimension is a paper by mathematician Benoît Mandelbrot, first published in Science in 1967. In this paper Mandelbrot discusses self-similar curves that have Hausdorff dimension between 1 and 2. These curves are examples of fractals, although Mandelbrot does not use this term in the paper, as he did not coin it until 1975.

The paper examines the coastline paradox: the surprising property that the measured length of a stretch of coastline depends on the scale of measurement. Empirical evidence suggests that the smaller the increment of measurement, the longer the measured length becomes. If one were to measure a stretch of coastline with a yardstick, one would get a shorter result than if the same stretch were measured with a ruler. This is because one would be laying the ruler along a more curvilinear route than that followed by the yardstick. The empirical evidence suggests a rule which, if extrapolated, shows that the measured length increases without limit as the measurement scale decreases towards zero.

There was no recovery on an averaging scale of just 5 quarters, there will never be a recovery under current political realities.  Obama's claim to stabilize the budget in his second term is just as laughable as Bush admin's "strong dollar policy" BS years ago.

The IMF doesn't exist but to serve the political class of the United States, the IMF is a fully captured appendage of the state, there will be a witchhunt against the IMF again, just as Wolfowitz was hounded, if the IMF dares cross the Washington DC power elite.

Thu, 07/08/2010 - 11:48 | 458399 rlouis
rlouis's picture

When reality contradicts the propaganda, turn up the volume on/of the propaganda.

Thu, 07/08/2010 - 13:02 | 458556 DR
DR's picture

"In this connection, the health-care reform provides a welcome basis for cost control,"


Wow, I had no idea that the IMF was in favor of the US Health Care Reform bill. With the bill's expansion of coverage, I though the IMF would have viewed the bill as being fiscally costly.



Thu, 07/08/2010 - 13:30 | 458634 traderjoe
traderjoe's picture

They would if they were independent.

Thu, 07/08/2010 - 13:43 | 458654 earnyermoney
earnyermoney's picture

Those sections were added as a result of consultations with Rahm and Axelrod.

Thu, 08/19/2010 - 11:18 | 530434 herry
herry's picture

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