Opinion: IMF says U.S. in for prolonged recession

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The Daily Telegraph:

"Episodes of financial turmoil characterised by banking sector distress are more likely to be associated with severe and protracted downturns than episodes of stress centred mainly in securities or foreign exchange markets," the IMF said.

"Based on a comparison of the current episode of financial stress with previous episodes, there remains a substantial likelihood of a sharp downturn in the United States," it said.

The findings, reported in chapters released a week in advance of the full World Economic Outlook, appeared to signal the IMF will be significantly lowering its economic growth forecasts in the semiannual report.

As statements of the obvious go, fair enough. Less impressive is the lack of indications of a few other global realities:

1. China. Where China goes, the world goes, to a very large extent, particularly the bread and butter consumer level and materials sectors.
2. Global growth is now the working mechanism. A downturn in the U.S. doesn’t help anyone, but the U.S. itself is a global exporter. There’s a reciprocal factor which doesn’t seem to be present in this report.
3. The severe levels of credit reduction need to be addressed. The U.S., to get out of this mess, has to be doing business and trading itself into a better position. That will require credit availability for U.S. businesses, which is exactly what's dried up.

I’m anything but a fan of the IMF, but this is an interesting point:

Analysing data in 17 advanced economies over the past 30 years, the IMF said that about 60 per cent of the 113 episodes of financial stress identified were followed by downturns that were banking-related.

And those downturns tended to be prolonged and more severe.

Meaning the underlying effects of financial stress are capital related. Where availability of capital declines, the impacts are a lot more immediate, and potentially far reaching. This was one of the reasons for the U.S. government’s determination to intervene in the current crisis. America isn’t just a “capitalist country”, it is very much capital driven.

The current situation is a direct threat to America’s capital, unlike any previously seen, and with levels of complexity that tie it directly into the global economy. Not only would America take a massive hit from an epidemic of defaults and credit drought, the rest of the world, which generates capital for America, would be severely hit. So the possibility of restarting the economy using trade would be seriously diminished.

Even in the 1929 Great Depression, the global economy was very much affected. Many countries didn’t get out of the Depression until after the Second World War. The effects of anything like that economic scenario, today, would be catastrophic.

The EU is seen as being much more stable by the IMF, but Europe isn’t really much of an indicator of the global economic outlook. The EU is big, but not big enough to make much of a dent if global trade deteriorates.

The IMF called on policymakers to take "strong actions" to deal with financial market stress, adding that support for the restoration of financial system capital seemed "particularly important".

However, it warned that policymakers "must seek to avoid longer-term moral hazard implications of any strategy to restore financial stability".

Which is what they’ve been doing. The central banks have, actually, been doing the right thing.

I just hope we never find out what “moral hazards” in a global Depression means.