IMF Cuts Global Growth, Warns Central Banks, Whose Capital Is An "Arbitrary Number", Is Only Game In Town

Tyler Durden's picture

"The recovery continues but it has weakened" is how the IMF sums up their 250-page compendium of rather sullen reading for most hope-and-dreamers. The esteemed establishment led by the tall, dark, and handsome know-nothing Lagarde (as evidenced by her stroppiness after being asked a question she didn't like in the Eurogroup PR) has cut global growth expectations for advanced economics from 2.0% to only 1.5%. Quite sadly, they see two forces pulling growth down in advanced economies: fiscal consolidation and a still-weak financial system; and only one main force pulling growth up is accommodative monetary policy. Central banks continue not only to maintain very low policy rates, but also to experiment with programs aimed at decreasing rates in particular markets, at helping particular categories of borrowers, or at helping financial intermediation in general. A general feeling of uncertainty weighs on global sentiment. Of note: the IMF finds that "Risks for a Serious Global Slowdown Are Alarmingly High...The probability of global growth falling below 2 percent in 2013––which would be consistent with recession in advanced economies and a serious slowdown in emerging market and developing economies––has risen to about 17 percent, up from about 4 percent in April 2012 and 10 percent (for the one-year-ahead forecast) during the very uncertain setting of the September 2011 WEO. For 2013, the GPM estimates suggest that recession probabilities are about 15 percent in the United States, above 25 percent in Japan, and above 80 percent in the euro area." And yet probably the most defining line of the entire report (that we have found so far) is the following: "Central bank capital is, in many ways, an arbitrary number." And there you have it, straight from the IMF.

The full details are below. 

Summing it up (via Reuters):

Global growth is too weak to bring down unemployment and what little momentum exists is coming primarily from central banks, the International Monetary Fund said in its World Economic Outlook, released ahead of its twice-yearly meeting, which will be held in Tokyo later this week.

The keyword is momentum. Or rather lack thereof:

Policy tightening in response to capacity constraints and concerns about the potential for deteriorating bank loan portfolios, weaker demand from advanced economies, and country-specific factors slowed GDP growth in emerging market and developing economies from about 9 percent in late 2009 to about 5¼ percent recently. Indicators of manufacturing activity have been retreating for some time (Figure 1.3, panel 1). The IMF staff’s Global Projection Model  suggests that more than half of the downward revisions to real GDP growth in 2012 are rooted in domestic developments.

  • Growth is estimated to have weakened appreciably in developing Asia, to less than 7 percent in the first half of 2012, as activity in China slowed sharply, owing to a tightening in credit conditions (in response to threats of a real estate bubble), a return to a more sustainable pace of public investment, and weaker external demand. India’s activity suffered from waning business confidence amid slow approvals for new projects, sluggish structural reforms, policy rate hikes designed to rein in inflation, and flagging external demand.
  • Real GDP growth also decelerated in Latin America to about 3 percent in the first half of 2012, largely due to Brazil. This reflects the impact of past policy tightening to contain inflation pressure and steps to moderate credit growth in some market segments—with increased drag recently from global factors.
  • Emerging European economies, following a strong rebound from their credit crisis, have now been hit hard by slowing exports to the euro area, with real GDP growth coming close to a halt. In Turkey, the slowdown has been driven by domestic demand, on the heels of policy tightening and a decline in  confidence. Unlike in 2008, however, generalized risk aversion toward the region is no longer a factor. Activity in Russia, which has benefited various economies in the region, has also lost some momentum recently.

IMF isn't happy about Europe:

Notwithstanding policy action aimed at resolving it, the euro area crisis has deepened and new interventions have been necessary to prevent matters from deteriorating rapidly. As discussed in the October 2012 Global Financial Stability Report (GFSR), banks, insurers, and fi rms have swept spare liquidity from the periphery to the core of the euro area, causing Spanish sovereign spreads to hit record highs and Italian spreads to move up sharply too (Figure 1.2, panel 2). Th is was triggered by continued doubts about the capacity of countries in the periphery to deliver the required fi scal and structural adjustments, questions about the readiness of national institutions to implement euro-area-wide policies adequate to combat the crisis, and concerns about the readiness of the European Central Bank (ECB) and the European Financial Stability Facility/ European Stability Mechanism (EFSF/ESM) to respond if worst-case scenarios materialize.


These concerns culminated in questions about the viability of the euro area and prompted a variety of actions from euro area policymakers. At the June 29, 2012, summit, euro area leaders committed to reconsidering the issue of the seniority of the ESM with respect to lending to Spain. In response to escalating problems, Spain subsequently agreed on a program with its European partners to support the restructuring of its banking sector, with financing  of up to €100 billion. Also, leaders launched work on a banking union, which was followed up recently with a proposal by the European Commission to  establish a single supervisory mechanism. Leaders agreed that, once established, such a mechanism would open the possibility for the ESM to take direct equity stakes in banks. This is critical because it will help break the adverse feedback loops between sovereigns and banks. Moreover, in early September, the ECB announced that it will consider (without ex ante limits) Outright Monetary Transactions (OMTs) under a macroeconomic adjustment or precautionary program with the EFSF/ESM. The transactions will cover government securities purchases, focused on the shorter part of the yield curve.


Importantly, the ECB will accept the same treatment as private or other creditors with respect to bonds purchased through the OMT program. (ZH: not really - especually not when the ECB has to see its bonds incur losses - see Greece)The anticipation of these initiatives and their subsequent deployment set off a relief rally in financial markets, and the euro appreciated against the U.S. dollar and other major currencies. However, recent activity indicators have continued to languish, suggesting that weakness is spreading from the periphery to the whole of the euro area (Figure 1.3, panel 2). Even Germany has not been immune.

.. or the US:

The U.S. economy also has slowed. Revised national accounts data suggest that it came into 2012 with more momentum than initially estimated. However, real GDP growth then slowed to 1.7 percent in the second quarter, below the April WEO and July WEO Update projections. The labor market and consumption have failed to garner much strength.

Could have fooled the BLS and the brand spanking news "7.8% unemployment rate."

The IMF concludes there is little to worry about as a result of global QEternity, an observation that certainly explains the following statement: "Central bank capital is, in many ways, an arbitrary number." ... right.

Risks related to swollen central bank balance sheets


The concern is that the vast acquisition of assets by central banks will ultimately mean a rise in the money supply and thus inflation (Figure 1.5, panel 3). However, as discussed in previous WEO reports, no technical reason indicates this would be inevitable. Central banks have more than enough tools to  absorb the liquidity they create, including selling the assets they have bought, reverting to traditionally short maturities for refinancing, raising their deposit rates, and selling their own paper. Furthermore, in principle, central bank losses do not matter: their creditors are currency holders and reserve-holding banks; neither can demand to be paid with some other form of money. The reality, however, may well be different. A national legislature may see such losses as a symptom that the central bank is operating outside its mandate, Central bank capital is, in many ways, an arbitrary number, as is well illustrated by the large balance sheets of central banks that intervene in foreign exchange markets (Figure 1.5, panel 4). which could be of concern if it led to efforts to limit the central bank’s operational independence. A related concern is that economic agents may begin to doubt the capacity of central banks to fight inflation. Two scenarios come to mind:


  • Public deficits and debt may run out of control, causing governments to lean on central banks to pursue more expansionary policies with a view to eroding the real value of the debt via inflation. Similarly, losses on holdings of euro area, Japanese, and U.S. (G3) government securities may cause emerging market economies’ central banks or sovereign wealth funds to buy fewer G3 government assets, investing instead in better opportunities at home and triggering large depreciations of G3 currencies.
  • Policymakers may falsely perceive central bank balance sheet losses to be damaging to their economies. Such perceptions may make central banks more hesitant to raise interest rates, because doing so would decrease the market value of their asset holdings. The mere appearance of such hesitation may lead private agents to expect an increase in inflation.

And some absolute profundity:

Risks related to high public debt levels


Public debt has reached very high levels, and if past experience is any guide, it will take many years to appreciably reduce it (see Chapter 3). Risks related to public debt have several aspects. First, when global output is at or above potential, high public debt may raise global real interest rates, crowding out capital and lowering output in the long term.3 Second, the cost of debt service may lead to tax increases or cutbacks in infrastructure investment that lower supply. Third, high public debt in individual countries may raise their sovereign risk premiums, with a variety of consequences—from limited scope for countercyclical fiscal policies (as evidenced by the current problems in the euro area periphery) to high inflation or outright default in the case of very large increases in risk premiums.


Simulations with the GIMF suggest that an increase in public debt in the G3 economies of about 40 percentage points of GDP raises real interest rates almost 40 basis points in the long term (Box 1.2). This simulation and discussion necessarily abstracts from the potential long-term benefits of fiscal stimulus. The 2009 stimulus, for example, was likely instrumental in averting a potential deflationary spiral and protracted period of exceedingly high unemployment, macroeconomic conditions that general equilibrium models such as the GIMF are not well suited to capture. Bearing this in mind, the simulation suggests that in the long term the higher debt lowers real GDP by about ¾ percent relative to a baseline without any increase in public debt. This is because of the direct effect of higher interest rates on investment and the indirect effect via higher taxes or lower government investment. The GIMF simulations indicate that within the G3 the negative effects would be larger, with output 1 percent below baseline projections. The loss of output over the medium term would be even larger if, for example, savings were to drop more than expected because of aging populations in the advanced economies or if the consumption patterns of emerging market economies with very high saving rates align more quickly than expected with those of advanced economies.


Scenarios that involve very high levels of debt and high real interest rates may not only result in lower growth but may also involve a higher risk of default when fiscal dynamics are perceived to be unstable. This combination of high debt and high real interest rates can lead to bad equilibriums, when doubt  about the sustainability of fiscal positions drives interest rates to unsustainable levels.

In other words, according to the IMF's brain trust, soaring debt, and exploding interest rates may lead to default. And that is why they get paid the big SDRs.

To summarize:

Risks for a Serious Global Slowdown Are Alarmingly High


The WEO’s standard fan chart suggests that uncertainty about the outlook has increased markedly (Figure 1.11, panel 1). The WEO growth forecast is now 3.3 and 3.6 percent for 2012 and 2013, respectively, which is somewhat lower than in April 2012. The probability of global growth falling below 2 percent in 2013––which would be consistent with recession in advanced economies and a serious slowdown in emerging market and developing economies––has risen to about 17 percent, up from about 4 percent in April 2012 and 10 percent (for the one-year-ahead forecast) during the very uncertain setting of the September 2011 WEO.


The IMF staff’s Global Projection Model (GPM) uses an entirely different methodology to gauge risk but confirms that risks for recession in advanced economies (entailing a serious slowdown in emerging market and developing economies) are alarmingly high (Figure 1.12, panel 1). For 2013, the GPM estimates suggest that recession probabilities are about 15 percent in the United States, above 25 percent in Japan, and above 80 percent in the euro area.

Summary revised (lack of growth) table:





Full report here

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Thomas's picture

She's hot. Any chick who has access to unlimited resources is hot.

Rainman's picture

Greened ya for truth

Dr Paul Krugman's picture

LaGarde needs to realize why the recession looms - in fact, the world is steeped in depression like tea in England; the reason is because there has not been enough done about the crux of the underlying problem:  we need to stimulate growth once and for all! 

The sweeping measures of the Central Banks may be unprecedented, but the measures should have seen more fire power from the go.  Even when the Federal Reserve Bank has ushered in its latest round of buying it is not enough.  This because they have never sent a clear signal to the markets that they will do what it takes.

When one says what will be done is what is needed to be done that is fine, but it is actually a mixed signal.  Bernanke and his team need to lay forth exactly what they will do. The terms of the latest round are too broad:  $40B or what is needed?  Just say what is needed!

A precise plan must be put forth on the scope, or else the economy will mire through what is a world recession, no matter how rosey the IMF paints the numbers.

markmotive's picture


Or hyperinflationary depression at worst.

The Fed is the last game in town? Good luck with that.

The Creature from Jekyll Island:

Dr. Engali's picture

No matter how big the number it's always easy to say they should have done more when it doesn't work.

Eye's picture

You want a precise and unlimited plan?  Doesn't that strike you as a contradiction?  We are not Gods.  We do not create something from nothing nor do we practice alchemy.  It is the belief in these possibilities that got us here and you want more of the same?  As the state controls more and more of the economy there is less and less of a real functioning market.  Furthermore, the more the state tries to manipulate things the more moral hazard creaps into the endeavor.  Far more moral hazard than would exist in a normal functioning market.  Direct functionaries of the state benefit first and they bestow their gifts accordingly. Is this how we inflate the currency, by pushing cash into the market through government employees salaries and their favoratism?  Haven't we learned anything from the Gulf oil rig disaster and the impotent oversight from the DOE.  WE NEED MARKETS!!  EDWARD HARRISON nails it in his piece titled "More on government tax coercion versus fiat money liberty."  Dr. Krugman,  how do you address this issue of moral hazard?  How do you limit the state if you give it unlimited power to produce currency and credit, distribute it as it sees fit, and allow it to purchase hard assets in a market at more favorable terms than private sector entrepreneurism?

yogibear's picture

Have the Fed print everyone $100,000 and be done with it. Now that will spur demand and cause prices to increase.

Just think of how much Apple will make with iSpending.

They want to counter deflation. Nothing like an in-your-face blatant printing instead of this elusive BS.

Send the money to the wealthy and they will invest it. Send to the people on welfare and in the hood and they will spend it.

The kids are up to their eye-balls in student loans, the money could be used to pay off existing debt. Not to mention how much I would make in commodities.

bank guy in Brussels's picture

The 'Lagarde List' just led to its 2nd suicide of a Greek person prominent with former gov't ministries -

Lagarde's list of thousands of European tax evaders who did not disclose their Swiss bank holdings as usually required to do so - List still secret, but people said to be on the list suddenly in 'suicides'

Ex-interior minister of Greece Leonidas Tzanis 'hangs himself' -

Vlassis Kambouroglou now dead too, also in connection with Lagarde's List -

Background: 'Christine Lagarde, Evangelos Venizelos,Troika austerity aims, and German corruption'

Cognitive Dissonance's picture

There is only one true and mighty Wizard. All hail the Wizard of Oz.

max2205's picture

Difference between the IMF and the SEC= IMF needs to watch more porn and stay away from the charts

spastic_colon's picture

and use the word "unexpectedly" more

Winston Churchill's picture

No shit,Sherlock(IMF).

Now tell us something we do not know.

knukles's picture

Meme:  Give to Caesar that which is Caesar's; give to Caesar that which ain't Caesar's.  You will be taken care of, like it or not.

Cdad's picture

Great.  I have been waiting for Lagarde to tell me when it is time to be bearish.  Now I can act.


Rainman's picture

Don't be hasty...she'll be caught with a tranny escort soon.

Dr Paul Krugman's picture

Some of you here have filthy minds. 

zorba THE GREEK's picture

Did you get a good look at her adams apple.

That bitch is a tranny.

blu's picture

She also gave birth. Twice.

Rainman's picture

splains the Chelsea matriarch/patriarch conundrum.....thought it was Janet Reno though, personally.

Xibalba's picture

Our only hope is to print money? Get ammo, silver, and bottled water.  Yous goi'n neeed it

CPL's picture

Ummm, you pretty much nailed it.


This is the IMF dropping the shoe.  Now watch the rush for the door.

Caggge's picture

Maybe a solution is to create a new central bank of the world that represents the people of the world. All the central banks of today are working for an elite few. The needs of the many outweigh the needs of the few. Of course, when corruption happens at the new central bank of the world it will be necessary that they prosecute all the fraud that happens. Unlike the current system where they prosecute no fraud by the chosen lords.

CPL's picture

Maybe we should ask the "elite" (to what?)  how they set theirs up?


I understand everyone stays so honest when they can print their money out of thin air.

Robslob's picture


The real truth is the Central Banks do not have access to resources...they have access to printers and those aren't the same thing.

The end game for these sad fucks (Central Banks) is to get away with printing garbage paper in return for "real resources" as quickly as possible hence their urgency to print before everyone, including Dumb Fuck Governments, realize what just happened!



Dr. Engali's picture

If only Ben would up that bond buying program to one trillion a month. Surely that would fix everything. I don't know why that basturd is being do tight with the printing press.

knukles's picture

When I was having a bowl of bean soup in the Senate Cafeteria earlier today he was mumbling something about a shortage of tungsten blanks.

Dr. Engali's picture

Bean soup in the Senate? Here I thought all that gas came naturally to them.

zorba THE GREEK's picture

If it wasn't for inflation, there would be no growth, ergo adjusted for

inflation Europe is contracting. Why can't they just come out and say that?


knukles's picture

Here's the perverted sick and twisted part of the story;

In each and every EU member country with the Exception of Greece, there has as of yet not been any significant slowing in gubamental expenditures.....  Fiscal policy by any stretch of the imagination remains neutral at absolute worst, to positive, stimulative.......
While monetary policies world wide are at print-a-bunch-a-day records.

So where is the contraction coming from?

The only alternative explanation is the Liquidity Trap caused by the Confidence and Lawlessness Traps.  
Good luck with fiscal and monetary policies dealing with that stuff...

Mesquite's picture

Police forces are a growth industry, it appears...

newworldorder's picture

The IMF has publicly admitted what many of us know. Markets have been relegated to keeping score of the game. The game is played by Central Bank manipulation. Not one central bank but those of the major and most populous powers.

Our central bank of course playes the role of "rich uncle from Mars," and is the lender of last results. Currency futures, swaps, metals supression are all tools the Central Banks will use to keep the world wide finacial ponzi going for a long period of time. Financial prudence, accounting rules and real assets will be manipulated as needed at will. There is no going back to "markets." QE to infinity OR world wide financial collapse. Pick your poison.

zorba THE GREEK's picture

I pick worldwide financial collapse. That way we can start over and maybe rebuild

a system with real checks and balances, a level playing field for all participants,

big and small. Or maybe it's all just a pipe-dream and corruption is the status quo. 

Zorba needs another rum and gingerbeer. 

CPL's picture

No, go read the article.  It's stating that it's come too far that QE doesn't matter anymore and financial collapse is a guarantee. 


This is where we see titans kill each other.  IMF stepped out of the corner first and pretty much said it's the banks fault. The rest of the news releases from the IMF make it look like the media department has gone completely crazy.  They haven't stopped either, articles stating the economy is going into the ditch.  I'm not sure how effective that is as an Alarm though if all this is in their newly reviewed numbers of soul crushing austerity coming to the USA.  Someone is obviously in a complete panic.

takinthehighway's picture

Buncha spoiled rich kids playing their fantasy finance league teams...

blu's picture

I'm maybe OK with them using "arbitrary numbers". It's when they start using irrational or imaginary numbers that I start to feel uneasy.

NotApplicable's picture

But just think of the accounting tricks that could be had!

Personally, I never even knew arbitrary numbers were powerful enough to save the world, yet CBs (and thus modern finance) wouldn't exist without them.

I should've paid better attention in math class.

NotApplicable's picture

Wait... I should've paid more attention in Accounting Class?

Fuckin' T-charts! How do they work?

orangegeek's picture

Someone text the IMF - the titanic has already hit the iceberg. 


The IMF cracks me up with their flat reports.


It's going to be 2013 before we read the IMF "we're fucked" reports - aka the deflation reports.

insanelysane's picture

there won't be an imf to write the report

NotApplicable's picture

You mean the "you're fucked" reports.

They will be unaffected.

q99x2's picture

So the banksters have moved Al-Qaeda into Spain and Italy to start fires and they are preparing to F'n kill them before they F'n kill us. Somebody call the cops. 

forwardho's picture

But,... But,... He's naked. He has no clothes on. At what point is this farce going to be seen for what it is? Time, bought at great expence, for the gov'ts of the world to prepare for utter chaos. One wonders, when will the curtain be ripped aside to show the naked exposure below? Who will be the first to see the ugly reallity that is our present.