A good use for the IMF: Bail out
America By Chan Akya
Continued expansion in the number of
delinquent borrowers in the United States this
week set off a panic for global stock markets that
has pushed equity markets into a free fall, while
the US dollar declined merrily against major
currencies. The crisis of confidence is, however,
still in its early stages, as various central
banks have yet to begin the process of reducing
their nominal holdings of US debt. As I wrote in
previous articles, [1] the time for America's
reckoning draws ever closer.
The country's
reduced popularity abroad only complicates
matters, as its excessive dependence on borrowings
from the rest
of
the world exposes it to wild changes in sentiment.
Readers with a historical bent of mind would
undoubtedly remember the story of Al Capone, the
country's most famous gangster. Even with the
weight of public opinion against him, not to
mention the best efforts of law-enforcement
agencies, he was finally jailed for tax evasion
rather than for any of his violent crimes. In much
the same way, the United States will be held to
account not so much for its unnecessary wars or
its contribution to global environmental damage,
but simply because it can no longer pay the bills.
Ugly sisters Every spring, the
International Monetary Fund (IMF) and the
International Bank for Reconstruction and
Development (World Bank) - the two so-called ugly
sisters of modern finance - hold a series of
confabs aimed at resolving their different
mandates and examine progress. Following from the
meeting last April, the two multilateral agencies
commissioned an external report on Bank-Fund
cooperation, the results of which were published
last month. [2]
The report cites common
goals for the two agencies, and recommends
increased collaboration. The basic motivation for
the report was the increasing criticism of the
agencies, and in particular the IMF, as
dinosaur-like entities that had no place in an
increasingly integrated financial community
globally. By recommending cooperation between the
two, the idea was to perpetuate the existence of
the two agencies.
As with most such
reports that involve the advice of external
consultants, this one is useless, mainly because
it looks out to the rest of the world while
ignoring the key need of the hour, namely a
financial rescue of the United States itself -
indeed, this could be quite timely for the next
meeting, which is scheduled for next month. Using
the template of IMF-led rescues of various
countries in Asia and Latin America over the past
few decades, I imagine below what a proposed
rescue of the US could cover, exaggerating only
modestly (tongue firmly in cheek for the rest of
the article).
Modest proposals The first mandate by the Fund is to ask the US
Federal Reserve to raise interest rates by 1,000
basis points (10 percentage points) immediately.
While the Fund recognizes that this will throw the
economy into a deep recession, it notes that the
result would not be worse than what happened to
other countries under the IMF program, such as
Argentina.
The overriding objective of the
IMF program for the US is to change its economic
engine from consumption to production. The agency,
however, recognizes that it has been a while since
Americans produced anything that they would
themselves want to buy, let alone anything that
the rest of the world would care for. It is
therefore recommended that the US focuses mainly
on cost advantages against Europe and Japan, and
embark on a program to devalue the US dollar
immediately.
All of America's trading
partners would need to accept lower US dollar
values against their currencies with immediate
effect. Adjustments would be proportional to the
level of US dollar debt held by those countries.
For example, while China would have to accept a
25% revaluation against the US dollar, smaller
countries such as Colombia would only need to
adjust by 5%. The approach to effectively
increasing trade barriers will provide the Fund
and the Bank with future customers among the
world's largest economies over the next few years.
US companies will be mandated to localize
production so that a minimum of 50% of their sales
in the US are made locally. For foreign companies
wishing to access the US market, the minimum
amount is set at 75%, with the exception of the
Japanese, for whom the limit stands at 100%.
The Fund recognizes that expanding local
production depends on the availability of labor
and thus recommends the opening-up of immigration
where required. Removing border controls would be
a first step.
Service-sector companies
such as banks will need to localize the processing
of information to similar limits as mentioned for
US manufacturers. This necessarily implies a
reduction of outsourcing activities, which the IMF
believes will hurt only a limited number of
developing countries, such as India, but can be
offset by the need to import more immigrants, as
explained above. Balancing the government's budget
would be high on the list of the IMF's priorities.
The Fund proposes that the government
achieve budget surpluses around 1% of gross
domestic product for the next five years, after
which the target would be balanced budgets. It
also requires the government to source at least
50% of its funding through long-term bonds, with
the balance split evenly between short- and
medium-term securities.
The Fund requires
the US government immediately to impose a fuel
duty of $1 dollar per gallon (26.4 cents a liter)
of gasoline as a way of improving overall
revenues. The government may also consider a
secondary tax on sport-utility vehicles of $2 per
gallon. With a view to improving the country's
record on sustainable development, the Bank will
require former vice president Al Gore to switch
off the electricity at his various homes.
Further cuts to the health-care budget are
also required, such as a freeze on hospital costs
at 1997 levels, decreased use of
government-provided medical insurance, and
implementing more lax gun-control laws.
The agencies are also studying significant
changes in dietary habits, proposing, for example,
the mandatory consumption of fast food and
carbonated non-diet soft drinks. In essence, the
World Bank expects that reduced longevity would
balance the US government's budget in coming
years.
The Fund will advise separately on
a rescue program for Japan in coming years, the
key objectives of which would be to increase
consumption and decrease production. It is also
noted that a merger between Japan and the US
produces desirable equilibrium for both countries,
achieving the IMF's objectives in both places.
With these proposals, the Fund and Bank
are enthusiastic in expecting a gradual recovery
of the US economy in the next five to 10 years,
while noting that neither entity is accountable
nor responsible for alternative outcomes.
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