The IMF's latest assessment of the world's economy contains a surprising policy suggestion. Should we be concerned (again), or is it just another part of the great plan?
If you really thought it was now safe to venture back into the markets now, then it is probably best that you don't read on.
What with it being a year since the last Euro crisis, and the Americans seeing sense and quietly raising their debt ceiling and agreeing a budget, I understand that some may believe that 'business-as-usual' is only around the corner. Add to the mix the Germans adopting an authoritarian tone in telling the Brits to stop being so independent about their European membership, and the English being similarly curt with the Scots, it seems normal transmission is indeed resuming.
But, if you want support for that view, then I suggest you don't look too closely at the detail.
For you don’t have to go far to find rather compelling evidence that normality is nowhere near close. The IMF briefing to the February G20 meeting contained a line (relatively well hidden) that suggests things remain scarily rotten and more than a tad out of kilter. A long, long time ago, during my economic apprenticeship, I learnt that interest rates could not go below zero. Indeed, it was incomprehensible for them to go under zero. It was the limitation of interest rate-based monetary policy that we had to acknowledge; there was no way around it, zero was the floor below which nominal interest rates could not go.
But, what do I find now? An IMF briefing stating "in the euro area ... more monetary policy is required ... including mildly negative deposit rates" (emphasis added). Yes, the world's bankers' organisation (and the chief designers and cheerleaders for international monetary policy best practice) suggests some interest rates might (should) have to go negative. To me this is a crystal clear signal that all is still not well in the global finance markets.
Maybe the IMF know this; and, maybe that is why this message wasn't trumpeted very loudly.
Contemplating (or imposing) negative deposit rates is aimed at encouraging the European consumer to spend. That is, don't put your money in a bank - because if you do we'll charge you for the privilege. Rather, go out and spend, spend, spend; because demand is still weak.
Normally, (yes, I know, there's that word again) when policy analysts want to bolster demand, they are supposed to suggest tax cuts, a government stimulus package, and/or a reduction in interest rates. As these options seem not possible for now, we now have the breathtaking suggestion of negative interest rates – but just don’t draw attention to this as it may mean we’ll have to re-write the textbook on international best practice monetary policy.
And that would put New Zealand in the difficult position of deciding which textbook to follow. Now, that really would tax the minds of the TINA (there is no alternative) proponents.