"It will surely take at least a decade... for the world economy to get back to decent shape" is the somewhat shockingly honest (and at the same time hopeful that ECOpocalypse does not happen before) outlook that the IMF's Olivier Blanchard offers in a recent interview with Hungary's Portfolio.ru via Reuters [10]. His diatribe of expectations that Germany would have to accept higher inflation, the US had to fix its fiscal problem, "Japan is facing a very difficult fiscal adjustment too" is more an understatement of facts than a forecast but on the bright-side he thinks China has turned the corner on its asset boom (but faces slower growth ahead). The reality is that, as he also notes, debt reduction (via default or deleveraging) is unavoidable and while he believes that this can be done without stifling growth in this credit-fueled world in which we have lived (though no mention of the tooth fairy). Dismissing the idea of inflation-targeting, he warns "You can have an economy in which inflation is stable and low, but behind the scenes the composition of the output is wrong, and the financial system accumulates risks." It seems the IMF is waking to the new reality - perhaps as evidenced by their actual disagreement with Greece over fantasy GDP data - though we fear what another decade of this will do to global instability.
Via Reuters [10]:
The world economy will take at least 10 years to emerge from the financial crisis that began in 2008, the International Monetary Fund's Chief Economist Olivier Blanchard said in an interview published on Wednesday.
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But even though the focus was on Europe's troubles now, he said, the United States also had a fiscal problem which it had to resolve.
"It's not yet a lost decade... But it will surely take at least a decade from the beginning of the crisis for the world economy to get back to decent shape," Blanchard said.
"Japan is facing a very difficult fiscal adjustment too, one which will take decades to solve. China has probably taken care of its asset boom but has slower growth than before, but we do not forecast any really hard landing," he added.
Blanchard said that adjustment in the euro zone required a decrease in prices in the bloc's indebted southern half and a rise in core countries.
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"A somewhat higher inflation rate in Germany should simply be seen as a necessary and desirable, relative price adjustment," Blanchard said. "Given overall demand conditions and the ECB's strong mandate to ensure price stability, this is not the beginning of hyperinflation," he said.
On the debt crisis, Blanchard said that debt reductions were unavoidable but it should be done without stifling growth, walking on a "narrow middle path."
"If you do it too slow, the market thinks you're not serious, if you do it too fast, you kill the economy. For each country you have to find the right path of consolidation," he said.
He said inflation-targeting had serious limitations and using just the main policy rate was not enough.
"You can have an economy in which inflation is stable and low, but behind the scenes the composition of the output is wrong, and the financial system accumulates risks."