Could the IMF’s Recipe for Recovery Spell Economic Ruin?

The International Monetary Fund is advising countries around the world to spend even more taxpayer money and continue to print paper currency as the only solution to the economic disaster caused by Covid-19. It recently put out a statement trying to demonstrate that global debt would rise “modestly” after the $14 trillion spent by governments around the world to combat the virus last year, and we have seen several industrialized nations announce plans to add several trillion dollars to the bill on both sides of the Atlantic.

Let us remember that developed countries more than tripled stimulus spending between 2008 and 2020 to try to offset the effects of Covid-19. On average they have spent and printed the equivalent of one third of the size of their economies. And some of us thought spending and printing the equivalent of 10 percent of GDP in 2008–2009 was unheard of!

The staggering amount of money created by the central banks of developed nations has not generated the demand it was supposed to trigger—the reason why we have not seen consumer price inflation of the kind one would expect with so much monetary stimulus. But we have seen asset price inflation on a large scale. For instance, the ratio of total stock market capitalization to gross domestic product worldwide is now close to 200 percent, double what it ought to be in a normal environment. Sooner or later, of course, we will see a large part of the newly created money spill over into the consumer economy with predictable results. But at this point what should be clear is that monetary stimulus cannot by itself generate growth and job creation. With central bank assets nearing 8 trillion dollars in the United States and 8 trillion euros in Europe, what more proof do we need?

The current environment, dominated by interest rate suppression, has caused some US$18 trillion worth of bonds to offer negative yields, and companies are having a very hard time making rational decisions. If the idea is to grow, create jobs and thereby increase demand, then endless monetary stimulus does not seem to be the answer.

Fiscal stimulus has not done the trick either. Some thirty countries now have debt-to-GDP ratios above 100 percent—twice the number in 2009. The debt overhang is a major drag on the economy, whatever multilateral organizations tell us. When so much debt accumulates over a period of time, interest rates eventually rise—and rise and rise. And so will taxes, because at some point someone will have to foot the bill. Those who argue that once growth picks up, the debt problem will take care of itself are missing a vital point. The debt overhang is a huge obstacle for economic growth.

The international consensus, now strengthened by President Biden’s own stimulus package, is that we can spend and print our way out of this crisis. Governments, multilateral bodies, political leaders left and right, and major news outlets are convinced that there is no other way forward. It is about time we went beyond stimulus and realized we need to unleash the productive forces that have been contained for the past decade in large part because of too much debt, too much money, and too much stimulus, a misnomer if there ever was one.

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