Tyler Durden
May 27, 2016
from ZeroHedge Website


In a stunning reversal for an organization that rests at the bedrock of the modern "neoliberal" (a term the IMF itself uses generously), aka capitalist system, overnight IMF authors Jonathan D. Ostry, Prakash Loungani, and Davide Furceri issued a research paper titled "Neoliberalism - Oversold?" whose theme is a stunning one:

it accuses neoliberalism, and its immediate offshoot, globalization and "financial openness", for causing not only inequality, but also making capital markets unstable.

To wit:

There are aspects of the neoliberal agenda that have not delivered as expected.


Our assessment of the agenda is confined to the effects of two policies:

  • removing restrictions on the movement of capital across a country's borders (so-called capital account liberalization)

  • fiscal consolidation, sometimes called "austerity," which is shorthand for policies to reduce fiscal deficits and debt levels

An assessment of these specific policies (rather than the broad neoliberal agenda) reaches three disquieting conclusions:

  1. The benefits in terms of increased growth seem fairly difficult to establish when looking at a broad group of countries.

  2. The costs in terms of increased inequality are prominent. Such costs epitomize the trade-off between the growth and equity effects of some aspects of the neoliberal agenda.

  3. Increased inequality in turn hurts the level and sustainability of growth. Even if growth is the sole or main purpose of the neoliberal agenda, advocates of that agenda still need to pay attention to the distributional effects.

Wait... you mean that the IMF becoming, gasp, Marxist?


Did last summer's dramatic interaction with Greece and its brief but memorable former Marxist finance minister, Yanis Varoufakis, leave such a prominent mark on the IMF's collective subconsciousness, that it is now overly rejecting the tenets on which the IMF was originally founded?



Let's read on for the answer...

Here is a very notable segment on "globalization" aka financial openness:

In addition to raising the odds of a crash, financial openness has distributional effects, appreciably raising inequality. Moreover, the effects of openness on inequality are much higher when a crash ensues.

It gets better:


The mounting evidence on the high cost-to-benefit


The mounting evidence on the high cost-to-benefit ratio of capital account openness, particularly with respect to short-term flows, led the IMF's former First Deputy Managing Director, Stanley Fischer, now the vice chair of the U.S. Federal Reserve Board, to exclaim recently:

"What useful purpose is served by short-term international capital flows?"

Among policymakers today, there is increased acceptance of controls to limit short-term debt flows that are viewed as likely to lead to - or compound - a financial crisis.


While not the only tool available - exchange rate and financial policies can also help - capital controls are a viable, and sometimes the only, option when the source of an unsustainable credit boom is direct borrowing from abroad.

The IMF then goes full-Magic Money Tree and reverts back to a mode first observed several years ago when it said that not only is austerity bad, but that unlimited debt issuance is probably good.

Markets generally attach very low probabilities of a debt crisis to countries that have a strong record of being fiscally responsible.


Such a track record gives them latitude to decide not to raise taxes or cut productive spending when the debt level is high.


And for countries with a strong track record, the benefit of debt reduction, in terms of insurance against a future fiscal crisis, turns out to be remarkably small, even at very high levels of debt to GDP.


For example, moving from a debt ratio of 120 percent of GDP to 100 percent of GDP over a few years buys the country very little in terms of reduced crisis risk.

But even if the insurance benefit is small, it may still be worth incurring if the cost is sufficiently low. It turns out, however, that the cost could be large - much larger than the benefit.


The reason is that, to get to a lower debt level, taxes that distort economic behavior need to be raised temporarily or productive spending needs to be cut - or both. The costs of the tax increases or expenditure cuts required to bring down the debt may be much larger than the reduced crisis risk engendered by the lower debt.


This is not to deny that high debt is bad for growth and welfare. It is...


But the key point is that the welfare cost from the higher debt (the so-called 'burden of the debt') is one that has already been incurred and cannot be recovered; it is a sunk cost.


Faced with a choice between living with the higher debt - allowing the debt ratio to decline organically through growth - or deliberately running budgetary surpluses to reduce the debt, governments with ample fiscal space will do better by living with the debt.

Of course, what both the IMF and the Magic Money Tree lunatics fail to grasp, is that the only reason debt interest hasn't exploded in a world that has never had more debt (a process that inevitably ends in war) is thanks to central bank monetization of said debt, and third party investors front-running said central banks.


Let's revert to the "low costs of debt" if and when runaway inflation forces central banks to reverse what has been a 30+ year process that started with the great moderation and will end either with helicopter money (and thus hyperinflation) or central banks owning every single assets (and thus the death of capitalism.

But back to the IMF's rant, just in case the IMF's dramatic U-turn on its support for a neoliberal agenda was not clear, here is another reiteration:

In sum, the benefits of some policies that are an important part of the neoliberal agenda appear to have been somewhat overplayed. In the case of financial openness, some capital flows, such as foreign direct investment, do appear to confer the benefits claimed for them.


But for others, particularly short-term capital flows, the benefits to growth are difficult to reap, whereas the risks, in terms of greater volatility and increased risk of crisis, loom large.


In the case of fiscal consolidation, the short-run costs in terms of lower output and welfare and higher unemployment have been underplayed, and the desirability for countries with ample fiscal space of simply living with high debt and allowing debt ratios to decline organically through growth is underappreciated.

The IMF's punch-line:

[S]ince both openness and austerity are associated with increasing income inequality, this distributional effect sets up an adverse feedback loop.


The increase in inequality engendered by financial openness and austerity might itself undercut growth, the very thing that the neoliberal agenda is intent on boosting.


There is now strong evidence that inequality can significantly lower both the level and the durability of growth.

And here is the IMF doing the unthinkable, and waving to Marx:

The evidence of the economic damage from inequality suggests that policymakers should be more open to redistribution than they are.

As a reminder, this is taking place just days after the St. Louis Fed admitted the Federal Reserve itself is, indirectly, a primary reason for the current record wealth inequality thanks with its focus on the "wealth effect" and boosting asset prices.


What is the conclusion from all this?


Perhaps that the push for global wealth redistribution, and an end to conventional capitalism, is in the works.

How this transition takes place is unknown:

whether by government decree, by regime change, by a - paradoxically - global government (one in which the IMF would be delighted to administer global monetary policy) to rein in globalization, or simplest of all, by helicopter money, is still unclear.

Whatever it is, something is coming, because for a stunning paper such as "Neoliberalism - Oversold?" to be published, it certainly had to be vetted not only at all executive levels of the IMF, but was surely preapproved by all legacy financial institutions.

And that should be the basis for great concern...




IMF Blames Neoliberalism

...for Low Growth and Increased Inequality
by Dan Wright
01 June 2016

from ShadowProof Website



Screen shot of IMF report on neoliberalism

showing Chile stock exchange.


A new paper from the International Monetary Fund (IMF), a pillar of neoliberal globalization and neo-colonial domination of the developing world, takes a rhetorical shot at the very system it perpetuates.

The paper, titled "Neoliberalism - Oversold?," is published in the June 2016 issue of the IMF's official journal, "Finance & Development," and starts its analysis of the spread of neoliberalism with post-1973 coup Chile where the military junta led by General Augusto Pinochet adopted an economic program crafted by U.S. economist Milton Friedman.


As the paper notes, in 1982, Friedman called Chile an "economic miracle" and the policies Chile implemented that had been proposed by Friedman and the Chicago Boys became a blueprint for what would popularly become known as neoliberalism.


The IMF notes two main planks of neoliberalism that went global after Chile:

"The first is increased competition - achieved through deregulation and the opening up of domestic markets, including financial markets, to foreign competition.


The second is a smaller role for the state, achieved through privatization and limits on the ability of governments to run fiscal deficits and accumulate debt."

While the IMF celebrates the globalization of neoliberal policies overall (how could they not given their institutional role), they do concede that there are,

"aspects of the neoliberal agenda that have not delivered as expected."

Specifically, the IMF paper cites removing capital controls and imposing austerity as particularly problematic for growth and wealth distribution, leading them to conclude:

  • The benefits in terms of increased growth seem fairly difficult to establish when looking at a broad group of countries.


  • The costs in terms of increased inequality are prominent. Such costs epitomize the trade-off between the growth and equity effects of some aspects of the neoliberal agenda.


  • Increased inequality in turn hurts the level and sustainability of growth. Even if growth is the sole or main purpose of the neoliberal agenda, advocates of that agenda still need to pay attention to the distributional effects.

In other words, austerity and unrestricted capital movements do not improve economic growth but do exacerbate inequality.


Though obvious to most, such an admission from the IMF is noteworthy, as is the alternative perspective in the paper's conclusion.


Rather than double down on deregulation and embrace Friedman's vision of unrestricted capitalism, the paper sides with economist Joseph Stiglitz on balancing market forces with a stronger regulatory state.


If the IMF genuinely adopted such a view then many of the loan packages given to countries around the world would have to change considerably.


Currently, states accepting IMF loans are typically required to deregulate their economy, privatize public resources, and open themselves up to foreign capital flowing in and out - the consequences of which have been continual financial and economic crisis.


Under this new understanding the IMF should, in theory, ask for more regulations, more stimulative state spending, and tighter controls on capital flows.


Then again, if the IMF did take such an approach, it would face intense resistance from its most prominent backers in the corporate and banking sectors that have benefited the most from privatizing public assets and unrestrained financial speculation.