• Marco Annunziata

Extraordinary Times Call For Ordinary Measures

The IMF’s Annual Meetings have delivered the customary dose of doom and gloom. The latest World Economic Outlook warns that “Risks to the outlook remain unusually large and to the downside.” After a long detailed list of things that could go badly wrong it reiterates, in case you missed the point: “The balance of risks is tilted firmly to the downside.” Ok, ok, we get it. And fair enough, we know the world economy is in a difficult spot.


But then IMF head Georgieva stated in her remarks: “What we are experiencing is a fundamental shift—from a period of relative stability, low rates, and low inflation to a period of high rates, high inflation, and much greater uncertainty.”


Now, hold on a second.


Yes, we are (finally) moving from a long period of low rates and low inflation to a period of high inflation and high rates. But greater uncertainty? Again? We’ve heard the “greater uncertainty” argument for over a decade now: the unprecedented uncertain recovery from the 2008 Global Financial Crisis; the risk of the Eurozone breaking apart in the 2012 debt crisis; the fiscal cliff and (preposterous) fears of a US sovereign debt default in 2013; recurring predictions of a China crash; fears of a new global financial crisis in 2016; the (spurious) 2018 reports of extremely high economic uncertainty; the risk of surging protectionism, the possible devastating impact of robots and Artificial Intelligence on employment…


Over the past decade, policymakers have routinely used the “greater uncertainty” argument to justify persistently loose policies. It was never the right time to normalize policy because there might always be some adverse shock lurking around the corner.


Paradoxically and predictably, those loose policies seeded today’s fundamental uncertainty. What causes real concern is not so much new global health scares or new energy and food price shocks, to pick from the IMF’s lengthy list. It’s how financial markets will handle the unavoidable transition to normal monetary policy settings.


The recent turmoil in UK financial markets might have been triggered by the unforeseen blunders of a clumsy new government; but its underlying cause is that a long period of extremely low interest rates forced pension funds into taking extreme leveraged risks.


IMF head Georgieva reiterates that “After navigating extraordinary challenges over the past two-and-a-half years, further extraordinary challenges lie before us.” It’s the Lake Wobegon global economy, where all challenges are extraordinary. (Note how high inflation has been reclassified from temporary nuisance to extraordinary challenge.)


Irony aside, I find reassurance in a closer reading of the IMF’s position. When you are competing for headlines with threats of nuclear Armageddon, you are forced to argue that your challenges are extraordinary. But the IMF’s recommendation for how to face these extraordinary challenges is largely a pragmatic reversal to common sense macro policies: monetary policy needs to stay the course to restore price stability; fiscal policy should “remain sufficiently tight” to support the disinflation effort, while targeting help to those who really need it (forget Universal Basic Income); and for those governments with sufficient strength and vision, a little attention to supply side reforms, please.


I could not agree more. Extraordinary times call for ordinary measures.

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