No rectitude please, we're freaking out

The only reason the IMF can forecast global growth of 3.9 per cent next year is that deleveraging hasn't actually begun yet and, it hopes, won't start soon.

It's a little bit ironic that the IMF, scourge of deficits and public debt, is urging the world to go easy on the rectitude. "Conditionality”, as the IMF calls what it wants in return for emergency loans instead of collateral, has been reversed. The condition for global growth now is for everyone to NOT do what the IMF usually wants.

Not that anyone except Germany is arguing for conditionality these days, but the idea that American politicians would actually allow the deficit reduction laws they have already passed to come into effect at the end of this year, or that Spain, Italy, France, Japan, UK, Ireland et al would do something decisive about their own debt levels scares the pants off everyone, including the pursed lips at the IMF.

So while most reports of last night's revision by the IMF of its world economic outlook focus on the warnings, the fact is that at 3.9 per cent growth is pretty good, and is higher than the long term average … as long as the US doesn't tighten fiscal policy, Europe's banks don't go broke and monetary policy in China actually works.

The IMF notes with some satisfaction that advanced economy budget deficits are forecast to decline by 0.75 per cent of GDP this year. First, we'll believe that when we see it, and second, that still leaves them with deficits at 6 per cent of GDP and public debt of 110 per cent of GDP in total.

Total global debt, according to The Economist's scary global public debt clock is now $45,837,020,184,877. Whoops, now it's $45,837,024,005,392. Oh, whoops, there we go again, now it's $45,837,029,049,471. Anyway, it's 65.5 per cent of global GDP, rising steadily.

That's just government debt. Global debt per country, including governments, households, corporations and banks, is now a weighted average of 417 per cent of GDP, according to Jamil Baz, an investment strategist with a firm called GLG Partners. I haven't been able to check that number but he sources Goldman Sachs and the Federal Reserve's Z Report.

The point is that it hasn't come down one bit since the crisis of 2007-08. There has been a lot of talk of austerity, and passionate argument from economists like Paul Krugman that it shouldn't happen, but there hasn't been much of it yet, and certainly not enough to reduce debt.

I'm not suggesting there should have been, far from it, but if and when it does happen, watch out.

Maybe the world's savers will be prepared to forgive the debt, or do a debt for equity swap. No, they won't do that. Or maybe the debtors could print enough money to create inflation and reduce the value of the debt that way. That won't work either because the creditors would simply demand higher and higher interest rates via the bond market so that the debtors wouldn't be able to service the loans.

But cutting debt the old-fashioned way (spending less than you bring in for a while) risks setting up a feedback loop. The "paradox of thrift” applies, which, as John Maynard Keynes explained, states that if everyone tries to save then aggregate demand will fall, which will result in total savings actually falling because of lower consumption and economic growth.


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