Ms. Lagarde Emerges From Solarium, Dispensing Advice

A Get-Together of Central Planners

Christine Lagarde, the well-baked looking leader of the IMF, was recently dragged away from her ultraviolet light arrays to put in an appearance at an event by the name of the “Michel Camdessus Central Banking Lecture”. No kidding, that's what that pow-wow is actually called.

It may be remembered that Michel Camdessus was the longest-serving IMF chief, after a stint at the Bank of France. A quintessential statist establishment globalist/central planner, who would certainly not have looked out of place as the head of GOSPLAN either. He received his postgraduate degrees in economics at  the Institut d'Etudes Politiques de Paris (Sciences Po) in Paris and more importantly, the traditional breeding ground of French bureaucrats and politicians, the  École nationale d'administration. He presided inter alia over the Asian crisis, and we wouldn't be overly surprised if his name has become a swear word in places like Indonesia.

The people getting together at such meetings likely number among the biggest obstacles to sustainable economic growth in the modern age. They would undoubtedly disagree vehemently with this assessment, but the reality of the matter is that their usefulness is indeed not far removed from that of Soviet commissars. They may be intelligent and well educated, but they are tasked with doing what is literally impossible. Leaving aside for the moment that every single major central bank was founded to promote special interests, the modern-day justification of central banking has been thoroughly refuted a long time ago already.

The idea that central planners can improve economic outcomes by interfering in the market economy is utterly misguided. It is impossible for a central planning agency to even come into possession of the information and knowledge that would be necessary for successfully performing its tasks, and even if that were magically possible, it would still not be in a position to know what actions to take. Central bankers are in essence faced with a special case of the socialist calculation problem. In their particular case, the “price” that will forever remain beyond their ken is the originary interest rate.

This interest rate would prevail in an unhampered market economy (on the loan market, a variable agio reflecting the entrepreneurial profit of creditors, a.k.a. the risk premium, would be added to it), which would in turn ensure the optimal allocation of scarce factors of production. It should be easy to see that it is not possible to improve on that outcome by interfering with interest rates and the supply of money and credit. We would know this even if the evidence that central bankers have become serial bubble-blowers that are leading capitalism ever closer to the abyss were not as glaring as it obviously is.

Ms. Lagarde used her appearance to inform the assembled bureaucrats and bien pensants that the global economy sucks even slightly more than she had believed hitherto. Normally we would interpret this as indicating that vigorous growth must be expected, on the general grounds that IMF-sanctioned pronouncements on the economy have a well-established, almost admirable, record of being contrary indicators. Given the unfettered money printing over the past several years, it seems however more likely that it is contrary only in the sense of not being anywhere near gloomy enough. Perhaps not for the coming year, but certainly in the longer term (and no, we won't “all be dead” by the time it arrives).

It actually isn't Nefertiti risen from her tomb, minus the bandages. It is the almost burned to a crisp IMF chieftain

(Photo via Reuters / Author Gary Cameron)

All Is Not Well – What To Do?

As Reuters reports, the IMF is about to declare yet another “global growth downgrade”, seasoned with a touch ofGesundbeten. To this it must be remembered that what is today called “growth” includes wasteful government spending, plus the statistical effects created by various bubble activities set into motion by central banks. We are not quite sure to what extent this deserves to be called growth. Naturally, even a severely hampered market economy is capable of creating quite a bit of genuine wealth. If that were not so, we'd have fallen off the proverbial cliff a long time ago. But there are undoubtedly limits to the depredations that can be inflicted on it.

Here is Reuters summarizing her speech:

“Global economic activity should strengthen in the second half of the year and accelerate in 2015 [the “Gesundbeten” part, ed.], although momentum could be weaker than expected, IMF chief Christine Lagarde said on Sunday, hinting at a slight cut in the Fund's growth forecasts.

Lagarde said central banks' accommodative policies may have only limited impact on demand and that countries should boost growth by investing in infrastructure, education and health, provided their debt stays sustainable.

The IMF's update of its global economic outlook, expected later this month, will be "very slightly different" from the forecasts published in April, she said. In April, the IMF had forecast that global output would grow by 3.6 percent in 2014 and 3.9 percent in 2015.

"Global activity is picking up but the momentum could be less strong than we had expected because potential growth is weaker and investment … remains subdued," she told an economic conference in southern France.

Lagarde made a plea for more public investment, saying the "investment deficit" in both the public and private sectors was dragging down growth in most countries.

"Despite the many responses to the crisis … recovery is modest, laborious, fragile, and measures to boost demand, despite the goodwill of central banks, will find their limits," she told a conference in southern France. "We must therefore take steps to boost efforts to strengthen growth," she added. "This is the opportunity in a number of countries to relaunch investment, without threatening the viability of public finances."

Lagarde said several times in her speech that, although now could be the time for some countries to boost public investment, not all of them could afford to do so. The positive impact of public investment on growth could be strong enough to allow for some state projects without weighing on debt-to-GDP ratios, she said.

After a first quarter that was much more disappointing than expected, there was now a marked rebound in the U.S. economy, she said. Growth should accelerate, said Lagarde, as long as the Federal Reserve's withdrawal from its easy monetary policy is orderly and there is a precise medium-term budget framework.

The euro zone is slowly coming out of recession and it is crucial that countries continue to carry out reforms, including completing the banking union, she said.

Lagarde said the IMF did not expect a "brutal" slowdown in China.

Saints preserve us. The IMF is evidently an inexhaustible fount of exceedingly bad ideas. A few comments on the above:

If you're in China, better batten down the hatches. Your country's economy is probably about to be brutalized.

Central bank money printing is “not creating enough demand”? As far as we are aware, a great many human wants remain unsatisfied. We can conclude that there is near boundless “demand”. No-one needs to egg it on. What limits people in exercising their demand is their ability to actually pay for it – and we obviously don't mean paying for it in the form of more confetti created ex nihilo by central banks.

So what is Ms. Lagarde's solution for this alleged lack of ZIRP- inspired demand? More government of course. Bureaucrats need to get creative and “invest”. The soundbites “infrastructure, health and education” are meant to indicate that this should not necessarily be expected to be completely futile. After all, who can possibly be against more infrastructure, health and education?

One may well ask where the bureaucrats are going to get the funds for these ambitious projects from. Santa Claus? If Santa Claus should prove indisposed, the only possibility that remains is to deprive the private sector of resources and let bureaucrats decide instead how they should be invested. The buying and selling decisions of consumers obviously don't figure very prominently in this scheme. Nor do the squeals of exasperated tax payers.

(Image via Financial Post / Illustration by Chloe Cushman)

Santa Claus desperately trying to work out the opportunity costs of all those investments in “infrastructure, health and education”.

In other words, what the world needs, according to Ms. Lagarde, is more central planning and government waste. What an amazing idea. We wonder if anyone has thought about it before. Actually, is seems someone has.

So US economic growth supposedly depends on the Fed's  “withdrawal from its easy monetary policy being orderly”.What exactly would an “unorderly” withdrawal entail? Ms. Yellen making handstands during her press conferences? Just asking.

And what, pray tell, is “a precise medium-term budget framework”? Is Ms. Lagarde insinuating that the US Congress has thus far been wasting untold amounts of money in an imprecise manner? That would be scandalous. Evidently, all will be fine if only sufficient precision could finally be brought to bear on its spending orgies.

An image suggesting imprecision in spending involving the president. The 20s have been generously contributed bymaster counterfeiter Frank Bourassa, who provided invaluable help in spurring spending in the US economy. Maybe Mr. Bourassa could be prevailed upon to help finance some infrastructure?

(Image via photobucket-com / Author unknown)

As to the European Union's banking union flight forward, the less said the better. Citizens with a propensity to save are bound to come to regret it. But then again, as another well-known bien pensant by the name of Martin Wolf recently opined, “cautious savers no longer serve a useful economic purpose”, so perhaps it is all for the best (note: a somewhat belated comment on the Wolf column containing this assertion is in the works and will be posted soon).

Idle rentiers, prepare to be euthanized!

(Photo credit: Ian McIlgorm)

Conclusion:

Ms. Lagarde has the perfect ideas for provoking more growth downgrades down the road. From our perspective, the economy needs neither the IMF, nor does it need central banks or government spending. In fact, it needs no “economic policy” at all.  All that is needed if a return to sustainable growth is desired is laissez-faire.  Not that we are likely to get it, unfortunately.

We have it on good authority that Santa Claus was actually murdered way back when comic books sold for a mere 25 cents (note that this one cost 50 cents due having 100 pages. The 25 cents variety costs $4 today, as a result of “price stability” policy). Sorry tax cows, Santa isn't going to help out.

(Image credit: DC Comics)