ECONOMYNEXT – World growth is at risk from elevated inflation, which require higher interest rates, the International Monetary Fund said while keeping projections for 2024 at 3.2 percent and slightly raising the 2025 growth by 0.1 percent to 3.3 percent.
“The risk of elevated inflation has raised the prospects of higher-for-even-longer interest rates, which in turn increases external, fiscal, and financial risks,” the IMF said in a July update to its World Economic Output report.
“Persistently high interest rates could raise borrowing costs further and affect financial stability if fiscal improvements do not offset higher real rates amid lower potential growth.
Global inflation went up after economic bureaucrats in the US, UK, Europe and many other countries printed money and states also expanded spending during Coronavirus, using some of the printed money.
The Fed in particular then delayed rate hikes claiming inflation was due to ‘supply shocks’ and while Vladimir Putin was also blamed, in a narrative that was also promoted by the IMF.
Western academics and the IMF itself call such actions – usually carried out by un-elected bureaucrats – ‘policy support’ to maintain ‘potential output’.
By 2022, inflation in Western advanced nations rose to levels not seen since the early 1980s with surging commodity prices creating shocks across and hunger in countries with central banks that produced depreciating currencies.
Meanwhile the report said price increases were still happening in many countries, partly due to services which were seeing lagged wage growth/
However, the gradual cooling of labor markets, together with an expected decline in energy prices, should bring headline inflation back to target by the end of 2025, the report said.
“Inflation is expected to remain higher in emerging market and developing economies (and to drop more slowly) than in advanced economies,” the report said.
“However, partly thanks to falling energy prices, inflation is already close to pre pandemic levels for the median emerging market and developing economy.”
While advanced economies were taking steps to maintain monetary stability, and the US delayed rate cuts amid unexpectedly persistent inflation, relatively stable emerging markets with reserve-collecting central banks delayed rate cuts.
“At the same time, number of central banks in emerging market economies remain cautious in regard to cutting rates owing to external risks triggered by changes in interest rate differentials and associated depreciation of those economies’ currencies against the dollar,” the report said.
“Prolonged dollar appreciation arising from rate disparities could disrupt capital flows and impede planned monetary policy easing, which could adversely impact growth.”
So-called ‘dollar appreciation’ is an outcome of tighter US monetary policy which tends to strengthen the US dollar against currencies of central banks which are not in the same credit cycle as well as commodities.
The IMF however advocated monetary debasement for reserve collecting central banks and targeting domestic anchors, instead of maintaining prudent interest rates to prevent unsustainable domestic credit from de-stabilizing the external sector, worsening confidence shocks, triggering capital flight and increasing default risks.
“Given that economic fundamentals remain the main factor in dollar appreciation, the appropriate response is to allow the exchange rate to adjust, while using monetary policy to keep inflation close to target,” the report said.
The agency also promoted more actions by unelected bureaucrats to use more complex policies it advised.
Simultaneously, the agency also warned against foreign debt.
“Foreign reserves should be used prudently and preserved to deal with potentially worse outflows in the future, in line with the IMF’s Integrated Policy Framework,” the agency said.
“To the extent possible, macroprudential policies should mitigate vulnerabilities from large exposures to foreign-currency-denominated debt.”
Classical economists have pointed out that economic shocks and the ‘manufacture of unemployment’ that come from eventual rate hikes, are a result of the original money printing that distorts economies.
“The continuous injection of additional amounts of money at points of the economic system where it creates a temporary demand which must cease when the increase of the quantity of money stops or slows down, together with the expectation of a continuing rise of prices, draws labour and other resources into employments which can last only so long as the increase of the quantity of money continues at the same rate – or perhaps even only so long as it continues to accelerate at a given rate,” classical economist Friedrich Hayek said in his Nobel prize winning speech in 1974 after Fed policies to the collapse of the Bretton Woods system.
“What this policy has produced is not so much a level of employment that could not have been brought about in other ways, as a distribution of employment which cannot be indefinitely maintained and which after some time can be maintained only by a rate of inflation which would rapidly lead to a disorganisation of all economic activity.
“The fact is that by a mistaken theoretical view we have been led into a precarious position in which we cannot prevent substantial unemployment from re-appearing; not because, as this view is sometimes misrepresented, this unemployment is deliberately brought about as a means to combat inflation, but because it is now bound to occur as a deeply regrettable but inescapable consequence of the mistaken policies of the past as soon as inflation ceases to accelerate.”
Sovereign default waves in mainly Latin American nations with reserve collecting central banks started after 1978, as depreciation became widespread after the IMF’s Second Amendment to its Articles as the US tightened policy under then Fed Chief Paul Volcker and the countries failed to hike rates in tandem to slow domestic credit. (Colombo/July17/2024)