July 18, 2008
IMF on the Global Macroeconomy, CBO on US-China Trade
The IMF released an update to it's World Economic Outlook yesterday.
- Global economic growth to slow significantly in second half of 2008.
- Rising energy, commodity prices have boosted inflationary pressure
- Need to adapt to shift in purchasing power from commodity users to producers
Posted by Menzie Chinn at July 18, 2008 08:14 AMdigg this | reddit
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The IMF released an update to its World Economic Outlook report yesterday. The headlines: "The global economy is in a tough spot, caught between sharply slowing demand in many advanced economies and rising inflation everywhere, notably in emergin... [Read More]
Tracked on July 18, 2008 03:07 PM
The world economy will slow down from 5% growth in 2007 to approx. 4% growth in 2008 and 2009 each.
This is still GROWTH, and rapid growth at that. If a recession/slowdown still means 4% growth, that shows how abundant the modern era is, and how hypersensitive everyone is to the slightest departure from their lofty expectations.
If this is a recession, I'll take it.
Posted by: GK at July 18, 2008 11:58 AM
I think the CBO uses a dumb methodology and it considers only one part of the effect of Chinese currency interventions. Better to try to estimate the net effect of the interventions on the U.S. current account.
Posted by: don at July 18, 2008 12:03 PM
Thanks for this. This kind of information is not presented on most blogs and so discussion is difficult.
You seem to actually be bringing two issues in one post. First is the IMF and the world situation, and second, is the OMB analysis of Renminbi/dollar monetary war.
Posted by: DickF at July 18, 2008 12:43 PM
Don't confuse a world aggregate number with growth by country. The US for example has been experiencing less than 4% growth for some years now and seldom grows at the world average. That means that the US is slowly declining in the world economy.
World growth is strong. This is primarily because countries finally understand that the IMF "solutions" lead to reduced growth and lost production. There are a number of countries who have taken the IMF's advice only to reject it when their economies began to tank. Only then have their economies began to recover.
The IMF formula is mentioned in the paper but only euphemistically. Notice the following on the first page of the entire report with my translation:
In many emerging economies, tighter monetary policy
Translation: higher CB interest rates
and greater fiscal restraint are required,
Translation: higher taxes and lower government spending on infrastructure.
combined in some cases with more flexible exchange rate management.
Translation your currency is strengthening as your economy prospers, but that creates a problem for the US easy money monetary policy and so you must cooperate with foolish monetary policy and appreciate your currency so that the US can increase exports and decrease imports.
And if you think I over state the situation consider the next sentence.
In the major advanced economies, the case for monetary tightening is less compelling,
Translation: we want to export to you while reducing your exports to us.
Posted by: DickF at July 18, 2008 12:55 PM
Could someone please explain this "inflation" thing:
"Rising energy, commodity prices have boosted inflationary pressure"
Inflation less food and energy doesn't seem to be a big problem, although the higher energy costs should eventually work its way through since its a component of almost everything - except wages.
Wage increases doesn't seem to be a big problem either.
For the layman, doesn't this just mean that we are getting poorer - i.e. relative price increases and not necessarily "inflation"?
Posted by: ltplayer at July 18, 2008 12:55 PM
Peak Oil is rearing it's ugly head. The situation will only get worse over the next 2-3 years and then it will get really, really bad.
The corollaries to peak oil are peak real credit and thus peak real money.
Look for lower highs and lower lows in the world GDP until the fractional reserve banking model implodes and the situation gets very ugly.
Posted by: Michael McKinlay at July 18, 2008 03:40 PM
DickF - Thanks! You've hit the nail squarily on the head. The G8 despirately wants a reduced rate of commodity purchasing by emerging economies to control inflation in their own economies.
Germany, Japan, and Russia with positive current account balances will do reasonably well while cash is king during credit contraction. Italy and France will do less well, but will find some protection via the appreciated Euro. The U.S. and Britain are in serious trouble, their economies are over-leveraged and their continued trade deficits can only result in significant currency devaluation (inflation).
Posted by: MarkS at July 18, 2008 09:11 PM
Consider there can be no inflation without an increase in the money supply. Let me give a very simple explanation. Assume the money supply is $100 and normally oil consumes $10 while other goods and services including savings and other such things consume the other $90. Now consider that something causes oil to increase such that it now consumes $20. Where is the other $10 coming from? If the money supply stays the same the monetary demand for other goods and services will have to decline. There will either be reduced consumption or lower prices of other goods and services, or a combination of both, the usual situation.
But now consider the inflationist solution. There is an injection of $10 into the money supply. But that will not be enough because the consumption of oil has jumped from 10% to 20% not just $10. The inflationist will chase demand without ever solving the problem. Inflation can never return the demand back to 10%. But what the inflationist does is increase the money supply to $112.50 so that the consumption of other goods and services is once again $90 even though it still only represents 80% of goods and services rather than 90%. This is the money illusion.
So, if you see that other goods and services are not declining in price but a commodity like oil is exploding in price you can be pretty confident in saying that the monetary authorities are inflating the currency allowing for the increase in the price of oil. This also should demonstrate that inflation does not increase prices. Inflation is a fall in the exchange value of money, a weakened currency, manifest in increased prices.
So, it cannot be that “rising energy, commodity prices have boosted inflationary pressure." Rising energy and commodity prices will force down other prices unless the monetary authority has an easy money policy, meaning inflationist policy. Inflation is always and everywhere a monetary phenomenon.
Posted by: DickF at July 21, 2008 02:56 PM
It took me a while to digest the CBO report and it is interesting.
Whatever the reason, the magnitude of the rise in the dollar prices of U.S. imports from China has been insufficient to substantially slow the rapid growth of those imports.
Here the report states that having the Chinese appreciate their currency is not having the desired affect on Chinese imports. Could someone tell the House and Senate.
The report describes a number of reasons this is the case.
The bottomline of the report seems to be that any attempts by our government to "level the playing field" by forcing an appreciation of the Renminbi has virtually no impact. The claims that the high value of the Renminbi compared to the dollar are significantly blowing smoke. Just congressional and administrative hot air.
Posted by: DickF at July 21, 2008 03:15 PM