The Fed, the IMF, and Stock Market Gyrations

The Fed spoke last week and the markets looked like a food-o-holics meeting at a Hardees Restaurant. I am not exactly sure what that means but I am trying to paint a picture of chaos. Got it?

What is a little different this time is that we are getting a refresher lesson in international macro. The bad news is that international forces could weaken the US economy. While we are used to news about how events in Syria and Iraq threaten us, the latest salvo has to do with exchange rates and softness in the world economy. We point our fingers at various allies when it comes to them lagging at supplying ground troops in Syria and Iraq – and now we point our fingers at China, Germany,  the EU, and various other places for not doing enough to buy our US exports. Those places are blamed for not stimulating spending enough and have let their currencies depreciate too much against the dollar.

Since the US government is incapable of managing the US economy the Fed is left as the last bastion of help to defend Main and Wall Streets. And the markets loved the idea that the Fed is truly “left” or liberal enough to think that keeping interest rates near zero for a while longer will make all the difference in the world.  It is strange that zero interest rates have been unable to spur the economy sufficiently when foreign countries were stronger – and now that our neighbors are weaker we cheer the same policies. Wow – please give me more of that allergy medicine now that I am really sick. It didn’t work for mild symptoms so maybe now it will have me dancing the jig since I am really sick. Huh?

What is interesting about all the light and fury last week is that there wasn’t any real news about the global economy. It is no secret that the dollar has been appreciating and no secret that much of Europe and Asia were struggling with growth. But aha – a report was published last week that underscored what we already knew. Somehow that underscoring of the old information was the news. Joe is 5’2” and cannot play for the Indiana Pacers. His girlfriend tells Joe that he probably won’t get a contract from the Pacers. Joe immediately becomes despondent and orders a case of JD.

The report that was published last week is the semi-annually published IMF World Economic Outlook. The October 2014 report is now widely available. Some of you believe all sorts of horrible things about the International Monetary Fund and have already changed the channel. But these reports from the IMF are well regarded and many economists and analysts come close to spiritual rebirth each time a new report is published. So let’s take a little walk down IMF Outlook lane and (  http://www.imf.org/external/pubs/ft/survey/so/2014/NEW100714A.htm ) and see what these folks told us that made us so crazy last week.

Let’s start with report’s Table 1 which lists annual growth rates for real GDP for various geographies. The last column of the table tells by how much the IMF revised its 2015 forecasts since July. Thus, the only real news is in that last column. Below I duplicate some of their findings for next year:

·        World economic growth revised down from 4.0% to 3.8%. Note 3.8% in 2015 is faster growth than in 2012, 2013, and 2014. Notice also that 3.8% is almost exactly equal to the average world growth of 3.9% per year from 1996 to 2005.

·        USA no revision – remained at 3.1% for 2015.

·        Euro Area revised down by -.02 to 1.3%. That 1.3% in 2015 compares to negative growth in 2012 and 2013 and 0.8% in 2014.

·        Japan revised down by -.2 to 0.8%. This is the slowest growth rate in the last three years.

·        Canada revised up 0.1 to 2.4%, highest in three years

·        Mexico revised up .1% to 3.5% faster than the last two years but down from 2012.

·        China no revision at 7.1% but lower than the average of about 7.6% over the last three years.

So this is what we are all getting blathered about? These are the revisions that contributed to a huge stock sell-off last week? Basically the US forecast was unchanged while NAFTA as a whole improved. Improved! The US and its closest trading partners had better forecasts for 2015 than from last July. Europe’s growth was knocked down a bit from July but growth is expected to improve in 2015 – Europe will have stronger growth than experienced in the last three years! Japan and China will have off years but notice that the world economy is predicted to grow faster than it has for three years.

There are some who say that the tone and words used in the IMF Report were more startling than the numbers I described above. So let’s see what the IMF said in its Forward – the part most people read.

It is easy to summarize. The IMF believes there are two problems facing the world right now. One is continuing to deal with the legacies of the past financial crisis. That means dealing with government debt and high unemployment. The second problem is that potential GDP is slowing.  Because of these two factors, confidence is declining.

The overall message says nothing about new shocks that might have caused them to revise downward their forecasts for 2015. Why have financial legacies and potential growth deteriorated since July? The truth is that the IMF simply saw some bad months in some bad places and decided to jump on the bandwagon of negativity. If growth is getting worse in Japan or the EU or Brazil – then surely they will continue to get even worse. Or will they?

Which brings us to the IMF’s policy remedies. First, despite noting government debt risks and pointing out that current Keynesian policies have not succeeded, the IMF wants countries to use even more Keynesian aggregate demand expansion to stimulate economic growth. Spend on infrastructure and if that isn’t enough then spend on “whatever”. Second, they recommend to most countries to use structural fiscal policies that improve the workings of labor markets, commodity markets, financial markets, government over-regulation and so on.

What I recommend is that the IMF not publish global forecasts until they actually have something to say. The above stuff is nonsense if not drivel. They want more Keynesian stimulus when it hasn’t worked and when it will explode national debt problems. They want to solve long-term issues with monetary policy that keeps interest rates low. They have been advising countries to restructure and free up their economic systems for decades with little result. Is Putin’s Russia really going to embrace more capitalism now that the IMF has asked them to do it for the hundredth time?

Despite all the geopolitical and other risks, the world economy is growing at an improving rate. Not all countries are sharing in that growth but that is usually the case. The last thing we need is for the IMF or anyone else screaming that the sky is falling.