“There is no economy in the world, whether low-income countries, emerging markets, middle-income countries or super-advanced economies that will be immune to the crisis that we see not only unfolding but escalating,” A statement by IMF head Christine Lagarde. She later went on to warn of “economic retraction, rising protectionism, isolation and…what happened in the 1930s (depression).”
The speech by LaGarde at the US State Department in Washington was partly in response to the infighting and bickering between the Euro nations and the UK regarding who needs to make sacrifices and who’s more solvent and should be downgraded first. Bank of France’s Christian Noyer addressing rumors of a possible French downgrade said that there wasn’t economic data that warranted that move and if there was a downgrade that the UK should be downgraded first.
François Fillon, Prime Minister of France said that Britain’s debt and deficit position has not been fairly evaluated in it’s triple A rating. Britain has become the whipping boy of the EU nations since it vetoed the European Union Treaty last week and Prime Minister Cameron said there was no chance of the UK participating in any newly negotiated European government or financial system. Many inside Britain fear economic and political reprisals as a result of veto and comments made by Cameron.
Conflicting financial positions in France and Germany have made it difficult as well to negotiate in good faith for long term solutions, LaGarde warned against `quick fixes’ and stated that all countries need to work together, “It is really that Gordian Knot that needs to be cracked, that needs to be addressed as collectively as possible, starting with those at the center but with the support of the international community probably channeled through the IMF,” she said.
In other financial news this morning the Credit Agency Fitch has downgraded several banks, which included Bank of America, Morgan Stanley and Goldman Sachs, as well as Europe’s Barclays, Societe Generale and BNP Paribas. Germany’s Deutsche Bank and Switzerland’s Credit Suisse were also downgraded. Fitch was the third credit rating agency to downgrade global financial institutions since September.
Meanwhile the Financial Times on some positive notes has come out this morning in a series, Is America Working, an assessment of the US Labor market and it’s technical skills and how `Creative Destruction’ (Capitalism) has turned US financial markets around in the past.
In an article on CNBC’s website, the IMF is quoted as seeing the need for the US to continue on the path of quantitative easing. This is an interesting departure from the global financial community’s (including IMF) criticism of the Federal Reserve’s policy of printing money to save the US economy at the expense of world economic conditions. Some have blamed global rising food, energy prices and unemployment on US monetary policy.
In an article last month, Raghuram Rajan, IMF economist told a forum held by the Council of Foreign Affairs, “The function of the Fed monetary policy adopted in November 2010 to boost the U.S. economy is relatively limited, the biggest problem in some sense is that the Fed’s monetary policy actions are essentially transmitted to the rest of the world, when the rest of the world doesn’t allow their exchange rates to move and protect their own monetary policy and keep that as a separate policy as its own.”
The mixed message being sent by the IMF is at best simply monetary policy conflicts between economic academics or maybe more sinister, the world’s next `central bank’ trying to move along the process of transferring the world’s currency reserve responsibilities from the Federal Reserve to the IMF.
To add to the intrgue, George Soros was quoted this weekend as saying, “The US could still absorb taking on more debt” and that a rush to pay down the debt could hinder its slow economic recovery.
These comments coming from the Paul Krugman’s of the world, who follow to the letter Keynesian government stimulus and monetary easing policies wouldn’t be surprising but the suggestions come from those most likely to benefit from the greased slide.
There’s been an important update on the move away from the USD as a reserve currency that we’ve reported about over the past several months. The International Monetary Fund (IMF) issued a report yesterday outlining the process to move from a world reserve currency for central banks based on the USD to a fund of Special Drawing Rights (SDR) that would include a basket of different currencies.
The IMF said that the SDRs would create a more stable currency environment by spreading the risk among several currencies while pointing out the volatility of the USD during the recession and recovery process over the past several years. US Monetary policy of quantitative easing has contributed to rising oil and food prices which has indirectly put pressure on oil dependent nations and other poorer nations that live marginally.
In an article on Money.com they report that Dominique Strauss-Kahn, managing director of the IMF, “acknowledged there are some “technical hurdles” involved with SDRs, but he believes they could help correct global imbalances and shore up the global financial system. “Over time, there may also be a role for the SDR to contribute to a more stable international monetary system,” he said. The goal is to have a reserve asset for central banks that better reflects the global economy since the dollar is vulnerable to swings in the domestic economy and changes in U.S. policy.”
Kahn also says that he could see where the IMF through a new reserve currency structure could issue bonds and other financial instruments. This would create a new centralized level of banking structure that would potentially sit above all national central banks. While there have been rumors of centralizing world banking and a new global regulatory structure as recently as Davos last month, this step would be a leap into that direction. The creation of a global banking structure that had the ability to produce ‘treasury-type’ bonds would compete directly with US treasuries for safety and liquidity and cause further erosion of USD value.
Fred Bergsten, director of the Peterson Institute for International Economics, “said at a conference in Washington that IMF member nations should agree to create $2 trillion worth of SDRs over the next few years. SDRs, he said, “will further diversify the system.”
We can’t stress enough how much the impact will be to USD value, particularly if US domestic spending and the US debt is not addressed to make the USD more attractive as it becomes more exposed to a competitive global market.