World Bank and the IMF to the U.S.: 'Stop the insanity!'

Posted by AzBlueMeanie:

Shorter version of the G-20, World Bank and International Monetary Fund (IMF) to the U.S.: "Stop the insanity!"

The rest of the world cannot believe that America has a dysfunctional government that is actually threatening the security and stability of the U.S. financial system, and thereby threatening the global financial system and economy as well. World Leaders Urge U.S. to Resolve Debt Limit Crisis:

Leaders at World Bank and International Monetary Fund meetings on Sunday pleaded, warned and cajoled: the United States must raise its debt ceiling and reopen its government or risk “massive disruption the world over,” as Christine Lagarde, the fund’s managing director, put it.

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Many leaders at the World Bank and I.M.F. meetings said they believed the impasse would be resolved before Thursday, when the government would be at severe risk of not having enough money to pay all its bills on any given day going forward.

But they pressed Treasury Secretary Jacob J. Lew and the Federal Reserve chairman, Ben S. Bernanke — who were both at the I.M.F. meeting — on the issue, predicting that even a near-default would lead to higher borrowing costs and a slowdown of the global economy.

“This cannot happen, and this shall not happen,” Baudouin Prot, chairman of the French bank BNP Paribas, said at a meeting of the Institute of International Finance also being held in Washington. “The consequences of this would be absolutely disastrous.”

Mr. Lew acknowledged the threat. “Our work begins at home,” he said. “We recognize that the United States is the anchor of the international financial system. With the deepest and most liquid financial markets, when risk rises, the flight to safety and to quality brings investors to U.S. markets. But the United States cannot take this hard-earned reputation for granted.”

Participants at the meetings remained on edge, given the gravity of the threat. Ms. Lagarde said “that lack of certainty, that lack of trust in the U.S. signature” would disrupt the world economy.

As Ezra Klein writes today, The rest of the world can’t understand why we’re doing this to ourselves:

To the rest of the world, the United States looks insane right now.

They're dealing with real problems that their political systems are struggling to solve. The United States' political system is creating fake problems that it may choose to leave unsolved.

"The United States was the one bright spot in the world recovery," says OECD Secretary General Angel Gurria. "It was leading the recovery! Leading the creation of jobs! This unfortunate situation with the budget and debt happens at the moment it was looking good."

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That global perspective drives Gurria's admiration of the U.S. economy. Look around, he says. "The U.S. is growing at 2-3 percent while Europe is only starting to rise from negative growth, and Japan is struggling to get prices up to 2 percent inflation. The U.S. is growing with very low inflation, and you are creating jobs. Perhaps you’d like it to be at a brisker speed, but you’ve created more than 7 million jobs in the last few years. These are just facts. You look even better compared to Europe, but even by themselves these numbers are objectively positive."

The United States' fiscal situation is also much improved. "Sequestration was not desired," Gurria says. "But it has the effect that now the deficit is going below 4 percent. Not long ago you were near double digits. So you have a fiscal consolidation; some might say it was too fast, but the deficit today in the United States is much lower than in the European countries. Everyone at home has a lot of doubts in their own economy and their own economic leadership and their own performance, but the fact of the matter is the U.S. has been doing a good job."

At least, it was doing a good job. But then the government shut down. And then U.S. leaders began fighting over default. Consumer confidence is plummeting as a result.

At best, the United States is slowing its recovery -- and that of the rest of the world. At worst, it's going to trigger another global crisis. That's why, Gurria says, his concern isn't that the United States' economy is weak, but that its political system is.

"More than any number of GDP or growth or debt, the question is whether the U.S. will has the institutions to move forward on the issues it has to deal with internally and then play the leadership role it plays for the global economy," he said.

In other words, the question is whether we'll stop being insane.

Even if the United States does not default on its debt, a debt-ceiling crisis could still lead to economic havoc and delayed Social Security checks. Hitting the debt ceiling would be terrible even if we didn’t default. A Debt-ceiling breach would push economy into free fall.

Comments

[Bruce Freiberg]

According to the Government's own budget documents, the government expects to take in about $2.26 trillion (in dollars of 2005 purchasing power)in fiscal 2013. So to avoid the necessity of raising the debt limit, the government need only reduce its expenditures to that amount. Such a reduction can hardly be described as draconian, because expenditures of this inflation-adjusted amount would bring the government back only to the government's average spending in 2002 and 2003. Thus, the government can resolve its present impasse simply by cutting spending to the real level it spent just 10 years ago. Quite simple, isn't it?

[AZ BlueMeanie]

Only if you are a dictator, and you don't care how much harm you do to your citizens and the world economy. $2.26 trillion in one fiscal year is a massive reduction of money in the economy.

The Joint Select Committee on Deficit Reduction aka the "Super Committee" in 2011 was tasked with developing a deficit reduction plan to cut at least $1.5 trillion over the coming 10 years. This Congressional "Super Committee" failed to achieve its assigned task -- a little thing called "democracy" got in the way -- and resulted in the automatic sequester cuts.

There are no simple solutions to complex problems.

[Bob Lord]

Simple? Did you consider the fact that our population has increased 10% since that time? And our elderly population has increaesd by more than 10% since that time? And the unemployment rate is higher now than it was at that time, thus increasing the need for safety net payments?

No, it's not quite that simple.

[Bob Lord]

Since 2002, real GDP has increased by about 20%. So, in order to keep spending at the same level in real dollars as it was in 2002, we'd need to reduce spending as a percent of GDP by almost 17%. But a considerable portion of the budget is fixed, so discretionary spending, as a percent of GDP would have to be reduced far more than 17%.

And you think this is simple?