By Michael Every of Rabobank
So near and yet so far appears to be the case on US fiscal stimulus. Mnuchin and Pelosi are still talking. The numbers they are talking about are still large (USD1.88 trillion vs. USD2.2 trillion). US President Trump is still talking about an even larger number. Yet we are now under two weeks to Election Day. At this stage, is there any electoral benefit for either side in passing a stimulus bill that won’t actually stimulate anyone to vote one way or the other, or is there more benefit in the blame game? 13 days left to find out.
Elsewhere, the IMF MD Georgieva gave a speech called “A New Bretton Woods Moment” – pretty eye-grabbing given the first BW moment built our current geopolitical architecture at the end of WW2, and the second BW moment in the early 1970s saw the end of the gold standard and the introduction of a fiat USD-based system that led us to where we are today.
So, what do the IMF (still known as the “I aM Fired” in some emerging markets) have to offer?
Section 1 was titled: ‘A sisterhood and brotherhood of humanity’. It notes “Today we face a new Bretton Woods moment. A pandemic that has already cost more than a million lives. An economic calamity that will make the world economy 4.4% smaller this year and strip an estimated $11trn of output by next year. And untold human desperation in the face of huge disruption and rising poverty for the first time in decades. Once again, we face two massive tasks: to fight the crisis today— and build a better tomorrow.” We can all concur there.
“We know what action must be taken right now,” adds the IMF. “First of all, we must beat the virus,” and so “continue support for workers and businesses until a durable exit from the health crisis.” Indeed. How we do that is less clear. But I digress.
What then? Opportunity beckons! “…we will have a chance to address some persistent problems — low productivity, slow growth, high inequalities, a looming climate crisis. We can do better than build back the pre-pandemic world – we can build forward to a world that is more resilient, sustainable, and inclusive. We must seize this new Bretton Woods moment.” Great! How?
Part 2: ‘Building Forward: Three Imperatives’
“First, the right economic policies. What was true at Bretton Woods remains true today. Prudent macroeconomic policies and strong institutions are critical for growth, jobs, and improved living standards. One size does not fit all—policies must be tailored to individual country needs….Strong medium-term frameworks for monetary, fiscal and financial policies, as well as reforms to boost trade, competitiveness and productivity can help create confidence for policy action now while building much-needed resilience for the future.”
So the “right” economic policies are needed,…and everyone gets to decide what these are themselves. If only we had all realized that while all pursuing all the wrong policies for so long! And didn’t the first BW have fixed exchange rates and capital controls and a rigid, ring-fenced world architecture the IMF now disavows? Today we already have new medium-term policy architecture – and yet central banks are shrugging and asking “what more can we do?” Of course, we must boost trade too, they say. Forget about making anything at home again, or just in case rather than just in time, or diversifying back to industry, where wages and productivity are higher than in services. Also, forget about labor vs. capital and monopoly and monopsony power. (This as the US DOJ files a suit against Google.)
And please keep “a careful watch on risks presented by elevated public debt.” Well naturally! Spend, spend, spend: then the austerity. Yet “where debt is unsustainable, it should be restructured without delay.” In developed economies, is that going to happen in any form other than negative interest rates and QE – both of which destroy productivity? Meanwhile, “policies must be for people”. Invest more in them; and in the vulnerable; and so raise human capital. Just don’t forget this has to be compatible with public debt targets and doing the “right” thing - which means no populism. (There are then sensible suggestions on low-hanging fruit issues like the gender gap in emerging markets, which make a lot of sense, but are not really in keeping with a BW global moment.)
Let’s get Green too – which implies massive public spending on the back of zero interest rates. That at least is in the spirit of Bretton Woods. But it does not square who *spends* the trillions and who produces all those Green goods, and so gets all the good jobs. That kind of focus on trade and capital flows was very much what Keynes was all about – but it gets no mention here. Perhaps because we have no idea how to square that circle without the IMF telling some of it slarge members that their mercantilism is going to blow up the global system (again).
Part 3: ‘The IMF’s Role’, who are “working tirelessly to support a durable recovery - and a resilient future”. Well, they do have a USD1 trillion lending capacity now, which used to be big money until Covid-19; and they “will continue to pay special attention to the urgent needs of emerging markets and low-income countries - especially small and fragile states, helping them to pay doctors and nurses and protect the most vulnerable people and parts of their economies.” If that is really what the IMF do nowadays, then wonderful. Genuinely. It does not explain what the developed economies who actually fund the IMF should be doing policy-wise though.
Part 4: ‘Seize the Moment’: “The best memorial we can build to those who have lost their lives in this crisis is, in the words of Keynes, “that bigger thing”— building a more sustainable and equitable world. Our founders did it. It is now our turn. This is our moment!”
Inspired? Good! Now central banks can get back to pushing junk bond and blue-chip stock prices higher to reward monopolists and monopsonists and day-traders; and government policy-makers can keep working out how many people can sit in a pub at what time of day before somebody else can’t visit their mum in the garden.
Meanwhile, in the real world, we are already seeing a BW-style shift in the global architecture. For example, the US just offered to fund at low, low rates Brazil’s acquisition of non-Huawei 5G equipment. The US separately signed trade agreements with it on steel, ethanol, and sugar and to promote greater US inwards investment. What does this say about who will sit closer to whom as the world starts to look more like it did at the time of the first BW – split into two rival blocs?
On another front, Israel and the UAE signed a deal to bring oil to Europe via extending a pipeline that already runs from Eilat to the port of Ashdod, which offers a cheap and efficient route for energy transit avoiding the Straits of Hormuz and the Suez Canal. Again, things are changing fast on the ground in real terms. So far and yet so near in this instance, for once.