They're not Sure What to Promote …

The IMF and the World Bank, these two excellent globalist storage sidings for over-the-hill politicians in need of a job that have perpetuated themselves successfully since the Bretton Woods conference, frequently pop up in the press with unwanted advice and unneeded forecasts.

In fact, they provide endless reams of useless economic forecasts, which usually don't pan out, but presumably require countless man-hours to produce. In spite of the waste involved, is actually a lot less pernicious than many of their other activities. These include 'policy advice' (some of which lately includes a number of proposals as to how to best impose 'financial repression' or tax the wealth of the subjects of various nation states to keep the charade of the regulatory welfare/warfare state going by all means) and activities in support of the global fiat money system and its ever-growing mountains of debt, in which capacity the IMF acts as a lender/enforcer and the World Bank as a distributor of 'development funds' that seem to do, well, whatever (it's not 'development', because the main recipients remain curiously undeveloped).

Anyway, the World Bank recently published a new economic forecast that proves once again that rising asset markets tend to write the news and can induce severe cases of wishful thinking:


“Global growth is set to accelerate in 2014 as advanced economies turn a corner five years after the global financial crisis, said the World Bank. Growth is projected to strengthen to 3.2 percent this year, 3.4 percent in 2015, and 3.6 percent in 2016 – up from 2.4 percent in 2013.

"Most of the acceleration is expected to come from high-income countries, as the drag on growth from fiscal consolidation and policy uncertainty eases and private sector recoveries gain firmer footing," the World Bank wrote in its newly-released Global Economic Prospects report on Wednesday.

Stronger growth and increased demand from developed nations will be an important tailwind for developing countries and should help compensate for the impending tightening of financial conditions, the Washington-based development bank said.


The bank says the withdrawal of quantitative easing and corresponding increase in global interest rates is expected to weigh only modestly on investment and growth in developing countries as capital costs rise and capital flows moderate in line with a global portfolio rebalancing.

"When we look at what's happened since December, markets have been broadly calm. And that gives us some confidence that we might see a much more smooth process going forward," Andrew Burns, a top forecaster at the World Bank and chief author of its Global Economic Prospects report, told CNBC Wednesday.”


(emphasis added)

This promotion is in keeping with the one recently propagated by the Fed, which asserts that nothing bad can possibly happen, 'QE works' and there is of course 'no bubble risk' in sight anywhere. This latter assertion comes from the soon retiring lame duck grand poobah Ben Bernanke himself, and should be discounted accordingly (the man was e.g. utterly incapable to spot the housing and mortgage bubble that even accordingly to his colleague James Bullard was 'blindingly obvious'. Of course Bullard in turn also failed to remark on this oh so obvious problem in real time, and hindsight is 20/20).

As our readers are probably aware, we usually try to employ a civil tone when criticizing various presumably 'well-intentioned' bureaucrats such as Mr. Bernanke. However, after having read a number of his tedious papers, listening to his speechifying and his forecasts (it may be better to call them 'anti-forecasts' actually) and seeing him in action, we can only uncharitably conclude that he is an utterly clueless and positively dangerous dunderhead. Easy for us to say of course, since we weren't tasked with bailing out all and sundry when the last Fed-produced boom-bust sequence blew up into the world's collective face. If you wonder what we would have done in his stead, we would have resigned – not during the crisis, but upon being nominated (hat tip to Mises).

Anyway, in this post we merely want to point out that the World Bank has joined the chorus of optimists who hope it will all be 'business as usual' from here on out.  Just as a reminder, these are the very same people who thought so between 2004 and 2007 – as long as asset prices are rising, they are simply unable to detect that anything might be amiss.


Not so Fast! There's an Ogre Stalking Us …

IMF chief Christine Lagarde (who we have the impression looks more and more like a mummy minus the bandages…) apparently felt that this was more that enough optimism. On the very day it was reported that according to the US government's 'inflation' measure CPI “…the cost of living in the U.S. climbed in December by the most in six months, led by gains in fuel and rents”, she felt compelled to issue a call for battle against the 'deflation ogre':


“International Monetary Fund Managing Director Christine Lagarde urged policy makers in advanced economies to fight risks of deflation that would threaten a global recovery she called “feeble.”

Less than a week before the Washington-based fund releases its new global growth forecasts, Lagarde said momentum in the second half of last year should strengthen in 2014 as developed economies gain pace. While the fund plans to raise its forecast for the global economic expansion on Jan. 21, it remains below potential of about 4 percent, she said.

Central banks in the U.S., Japan and the euro area face inflation levels under their targets while trying to accelerate growth with policies including benchmark interest rates near zero and bond-buying programs. Lagarde said that while “the deep freeze is behind,” world growth remains “too low, too fragile and too uneven,” with some 200 million people needing employment.

“The world could create more jobs before we would need to worry about the global inflation genie coming out of its bottle,” Lagarde said in a speech at the National Press Club in Washington today. “With inflation running below many central banks’ targets, we see rising risks of deflation, which could prove disastrous for the recovery.”

“If inflation is the genie, then deflation is the ogre that must be fought decisively,” she said. Lagarde’s call for the leading economies to act to prevent a prolonged, broad decline in prices was her most pointed warning on the subject in speeches delivered since she became IMF chief in July 2011.

She recommended that central banks in the most developed economies wait until “robust growth is firmly rooted” before ending unconventional monetary policies such as asset purchases. In the U.S. “it will be critical to avoid premature withdrawal of monetary support and to return to an orderly budget process, including by promptly removing the debt ceiling threat,” she said”


(emphasis added)

Let us take this step by step. Is there a 'risk of deflation'? To this one must first properly define deflation. In Ms. Lagarde's view it is a 'decline in prices', but it should be obvious that a decline in prices can be no danger. On the contrary, it would be a boon (who doesn't want to pay less for stuff?).  In any case, the proper definition of deflation is a decline in the money supply. This is something that can inherently always happen in a fractionally reserved banking system. Since the banks create deposit liabilities for which no backing in terms of standard money exists, deflation remains a theoretical possibility even in a fiat money system. The stress should be on 'theoretical'. We know that we have pointed this out quite frequently, but here is what the data on 'deflation' look like thus far:




US broad money TMS-2 since 1987 – via Saint Louis Federal Reserve Research – click to enlarge.



There is today 240% more money in the US economy than in early 2000 when the Nasdaq bubble blew up. While this is not necessarily indicative of what will happen in the future, these are the facts as they stand today.

Next let us address the assertion that 'economic growth remains below its potential', which Lagarde allegedly knows to be precisely 4%. This is just nonsense. The so-called 'output gap' is a figment of the Keynesian imagination. There are no fixed percentages by which the global economy must grow. The idea of the output gap is based on the associated notion of 'idle resources', but this simply overlooks that capital is not a homogeneous blob. Instead it consists of numerous heterogeneous goods of varying specificity. As an aside, while labor is relatively non-specific, it is also not homogeneous (for instance, a great number of construction workers that were needed when millions of houses were built during various real estate bubble episodes all over the world are simply no longer needed in this capacity). Since the previous credit booms have resulted in massive capital misallocation in a number of industries, there is a lot of capital that is 'idle' mainly because it is a useless remnant of these misallocation orgies. Much of the capital that should have been liquidated hasn't been, due to  monetary pumping by central banks and it is fair to assume that new malinvestments have been added to the pile.

Let us assume that it is true that 200 million people need employment and cannot find any at the moment. Even if we grant this to be so, there is no logical connection between this assertion and what follows. Neither the IMF, nor central banks, not any other government arms can 'create employment'. They could get out of the way and let the market work o as to restore a sound foundation for genuine, sustainable growth, but that would be tantamount to admitting that they are superfluous to requirements, hence it won't happen.

We already addressed the deflation ogre question further above. Let us just note that in the modern fiat money system all we ever get are deflation scares. Genuine deflation is rarer than hen's teeth.

Also, she obviously seems to think that central banks should continue to inflate. Would she have had a different opinion after the Nasdaq crash? We don't think so. In other words, she is recommending that the policy that has brought on one of the biggest financial and economic calamities of modern times should once again be pursued, only with even more vigor. What was it that Einstein said about the definition of insanity?

As to the alleged 'debt ceiling threat', to even mention it is simply beyond ridiculous. Ever since the debt ceiling was originally introduced, it has never – not once – proved an obstacle to expanding the government's debt. That it is even called a 'ceiling' is a bad joke. At best we can refer to it as a constant reminder of the Orwellian language employed by the ruling classes. Let us assume hypothetically though that the debt ceiling were to be taken seriously and actually enforced. Why would that be a 'threat'? It would be the precise opposite: it would remove a sizable part of the burden of government spending on the economy and would force government to shrink a little bit (it would still remain a Leviathan even if it were to stop accruing additional debt).



All in all, it would probably be best to implement the exact opposite of every proposal Ms. Lagarde has forwarded. Of course we agree that if the central banks were to stop inflating, the economy would likely turn down initially, as numerous economic activities the existence of which depends on monetary pumping would have to be discontinued. This is painful in the short term, but at least it puts a stop to the consumption of scarce capital. It is in any case impossible to create an 'eternal boom' by simply continuing to pump. That could only postpone the necessary adjustments and would ultimately invite an even greater disaster. The decisive point that is continually glossed over is this: there is no 'painless' way out. The choice is only between abandoning the inflationary policy sooner or later – the later it happens, the worse the results will be.



bust-xyz-ogre-05The deflation ogre has invaded Ms. Lagarde's nightmares.

(Image by Jordu Schell)




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5 Responses to “Ogre Spotting”

  • Sunonmyface:

    As usual, I am confused.

    I have read elsewhere (sorry no links, just from short term memory) that yes, the FED is producing more money for the banking cartels. However, credit (i.e., bankruptcies, paying down loans, etc) is being reduced at even a greater rate than the FED is creating money. If this is true, then is there not deflation in the money supply?

    Anyone able to help me deal with my confusion?

  • No6:

    Largarde, a socialist politician, was always clueless, but at least she looked sharp and sane. After one year at the IMF now look at her!

  • zerobs:

    but it should be obvious that a decline in prices can be no danger.

    Now you know and I know that wages are prices. And falling wages are a danger in a world of debt and taxation.

    Of course we both know that the World Bank, the IMF, and the other blackguards consider wages as something entirely different from prices (perhaps they consider them entitlements).

    • Kimo:

      “And falling wages are a danger in a world of debt and taxation.” By that reasoning, rising wages are an equal danger in a world of savers and taxation. Those that fear falling wages, should tremble first when wages rise. It is harder to imagine a more clear example of madness, to promote exponential inflation to achieve price stability. If you wish price stability, attack fractional reserves.

      • Unfortunately, price stability means to make sure prices don’t decline. Read Rothbard’s “America’s Great Depression”. Hoover pursued this policy all through the 1920’s, as did FDR later. The depression was over about 1949 when all is said and done.

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