It is all about the debt for the International Monetary Fund

The International Monetary Fund has had a troubled credit crunch. A major factor in this has been the way that its Managing Directors which as it happens have both been French politicians have moved it away from its original methodology. It used to help with balance of payments problems and whilst its austerity and devaluation/depreciation policies did not always work they did have plenty of successes. However it has increasingly become an organisation which helps with fiscal problems in the Euro area which have not always come with trade problems as for example Ireland had many years of surpluses. The move into the Euro area the major problem that devaluation was replaced with “internal competitiveness” which has pushed Greece into a depression and after a brief flurry Portugal is struggling again. It of course also had the issue that the Euro area is overall wealthy and could have financed it by itself.

Also there is the issue of a lamentable forecasting record as summarised below. From @ChristianFraser.

IMF on June 18th: “Brexit will trigger UK recession”

IMF on Sept 4th: “Britain will be fastest growing G7 economy this year”.

Is it all about the debt?

This is in some ways an economic virtue and in other ways a vice and perhaps even a four-letter word. The IMF has come up with some new analysis so let us steel ourselves for the inevitable barrage of very large numbers.

The global gross debt of the nonfinancial sector has more than doubled in nominal terms since the turn of the century, reaching $152 trillion in 2015. About two-thirds of this debt consists of liabilities of the private sector.

In all the analysis of public-sector debt the issue of private-sector debt is often more of a backwater so it is good to see it being looked at. Also we get an estimate of how we can compare the debt level to economic output.

Although there is no consensus about how much is too much, current debt levels, at 225 percent of world GDP , are at an all-time high.

There is the issue that we are comparing a stock (national debt) with a flow (GDP or Gross Domestic Product) but it does at least give some sort of guide. We also are taken through the problem that has been created.

The negative implications of excessive private debt (or what is often termed a “debt overhang”) for growth and financial stability are well documented in the literature, underscoring the need for private sector deleveraging in some countries.

However the IMF fails to see that this may be a feature and indeed theme rather than coincidence.

The current low-nominal-growth environment, however, is making the adjustment very difficult, setting the stage for a vicious feedback loop in which lower growth hampers deleveraging and the debt overhang exacerbates the slowdown.

There is a real swerve here which may be overlooked and this is that the “nominal growth” the IMF is apparently so keen on includes the good which is real growth but from the point of view of the ordinary worker or consumer the bad which is inflation. The more of the latter we see then an improvement in the spread sheets of the IMF will be accompanied by a deterioration in the economic experience of the ordinary person. Putting this another way we now see in my opinion the real reason why central banks want to target consumer inflation at 2% per annum and some want an even faster rate. For example my debating opponent on BBC Radio 4’s Money Box the ex Bank of England economist Tony Yates called for a 4% inflation target in March 2015. In my view that improves Ivory Tower style spreadsheets whilst harming the ordinary person.

How did we get here?

Twisting slightly the lyrics of Talking Heads we find out this.

The genesis of the global debt overhang problem resides squarely within advanced economies’ private sector. Enabled by the globalization of banking and a period of easy access to credit, nonfinancial private debt increased by 35 percent of GDP in advanced economies in the six years leading up to the global financial crisis.

So it was us although not quite everyone reading this as looking at the readership by country from yesterday Zambia was 7th and Thailand 8th. It was nice to see that I get around.

Meanwhile the situation with public-sector debt was much more restrained.

Interestingly, public debt declined across all country groups up to 2007, particularly among low-income countries—mainly as a result of debt relief under the Heav-ily Indebted Poor Countries and Multilateral Debt Relief Initiatives.

That makes the IMF switch to dealing with public-sector debt and in particular it in the Euro area even harder to explain. After all it is now in favour of fiscal stimuli which must make very hard reading in the countries in Southern Europe and particularly Greece which suffered under its fiscal yoke called austerity.

This may suggest that fiscal policy and, in particular, the early tightening in the latter (Euro area) may not have helped in facilitating the adjustment.

In essence the IMF is arguing that this was a good thing.

As private debt started to retrench, public debt picked up, increasing by 25 percent of GDP over 2008–15.

It is also true that some of this was the socialisation of what was private debt as bank debt found its way onto the ledgers of taxpayers in more than a few nations.

The good, the bad and the ugly

The IMF occupies all three positions on extra debt. First we get the implication that it would be good here.

In particular, there
is evidence that some European banks—burdened by
high levels of impaired assets and a low-growth environment—may
not be in a position to extend the necessary
credit flows to sustain normal economic activity, contributing
to a deeper economic slump

But later the implication is that it is bad in that we need to deleverage.

Private sector deleveraging in advanced economies
thus far has been much slower than previous successful
experiences, indicating that the adjustment will have to

which is repeated here.

Data for a sample of advanced economies suggest
that private debt is high in some cases, even after assets
are accounted for, a harbinger of possible deleveraging

Then we reference to Brazil and China in particular we get the view that it is getting ugly.

Meanwhile, easier financial conditions in the aftermath
of the global financial crisis have led to a private
debt boom in some emerging markets, particularly
in the nonfinancial corporate sector


The IMF here is following the FPC (Financial Policy Committee) of the Bank of England in simultaneously wanting more and less debt. I still remember Lord Turner apologising for telling banks on the one hand to deleverage and on the other to expand lending. That may work in an Ivory Tower but not in the real world.

Next we have the issue that the policies that are supposed to have helped in this such as lower interest-rates ( 102 official reductions so far this year according to @ReutersJamie) and lower bond yields via QE have not helped. The IMF points out that economic growth is still struggling relatively but fails to grasp the fact that I for example have argued from the beginning that such policies have side-effects ( as I analysed yesterday) and in some cases reduce economic growth.

Also it is hard to know whether to laugh or cry as the IMF of Euro area fiscal austerity which plunged Greece into an economic depression that is ongoing calling for this.

Premature tightening of fiscal policy in depressed economies with weakened financial systems should be avoided to the extent possible……..Targeted fiscal interventions could be used to facilitate balance sheet repair.


Me on TipTV Finance


15 thoughts on “It is all about the debt for the International Monetary Fund

    • about 8-9% of derivatives are whats left after winding down

      still a God damm lots of money though …..


      PS: so long as my popcorn fund is ok 😉

  1. Great blog, Shaun, as usual. You write: “There is a real swerve here which may be overlooked and this is that the ‘nominal growth’ the IMF is apparently so keen on includes the good which is real growth but from the point of view of the ordinary worker or consumer the bad which is inflation.” This is true, but if one’s standard for fiscal prudence is keeping the debt-to-GDP ratio constant or falling then there is no need to distinguish between them. I suspect that this is also part of the reason that nominal GDP targeting seems to be making a comeback as a proposed alternative to inflation targeting for central banks. In Canada, the Trudeau government is very big on the debt-to-GDP ratio as it seems to have no intention of ever balancing the budget again, (There was a .
    Maybe the world needs to look at alternative measures of fiscal prudence. Nominal GDP is notoriously variable, and probably would continue to be so even if it were targeted. It is also subject to big data revisions, which is a big problem for the debt-to-GDP ratio as a fiscal yardstick.

      • As Tonto said to the Loan Arranger – White man speak with forked tongue, Kemosabe.
        (yes, I know it’s an old one, sorry!)

        Bob J’s link to yahoo finance contained a link at the end of the piece to Joseph Stiglitz. It’s a short video clip in which he says “deficit fetishism” drives him crazy. He argues that it’s crazy to look just at gross debt; what matters is net debt. What’s more governments should borrow at ultra low interest rates to invest in assets (infrastructure, people, technology and so on) for a real return.

        Unfortunately, when that argument is carried over to the private sector it breaks down. The biggest problem is that asset values can vary; so gross debt really does matter. Years ago “debt versus asset value” got out of whack in the US sub-prime mortgage market – then look what happened!

        • Years later we have a solution to the problem of private sector debt crises causing problems in banks (then economies!) – keep asset values up. Tell the private sector that it’s net worth that matters, not wealth nor gross debt. Ultimately there’s no limit to debt as long as there’s no limit on asset values – amazing!
          Either it was a very deep well or Alice was falling very slowly, for she had plenty of time to look about her and wonder what was going to happen next.

        • Stiglitz is WRONG!
          All debt carries risk and so its repayment cannot be relied upon.
          Illiquidity can be a killer too.

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