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Wealth Management: Strategy blog – IMF: this time is different

Strategy team: Kevin Gardiner

As if 2020 weren't strange enough, now the IMF has gone Keynesian. Its latest fiscal monitor argues that even as government debt ratios touch 100% of GDP, politicians shouldn't respond by raising taxes or cutting public spending, but carry on borrowing and invest for growth.

Cutting deficits quickly now, the Fund argues, would put recovery at risk, deepen poverty and exacerbate inequality.

We agree: there is no need for urgent retrenchment. If investors were deeply unhappy about the debt, bond yields would be rising, even in the face of all that central bank buying (QE). They aren't, and the IMF is knocking on an open door.

But some observers will have mixed feelings. Clearly these are special circumstances – but lots of other circumstances have been special in the past, only for the IMF to urge fiscal austerity and monetary rectitude.

Think of the austerity programmes that followed the Global Financial Crisis; the many emerging economies which had to "adjust" before being offered Fund programmes; and the countless "progressive" ambitions and manifestos curtailed and taken to task for their proposed borrowing plans.

Similar frustration was perhaps expressed in pre-IMF days when the Labour ex-minister Sidney Webb said, as he watched a Conservative government take the UK off the gold standard, "Nobody told us we could do that".

Indeed. Nobody told governments they could borrow this much and get away with it. Most people, most of the time, led by the IMF, and cheered on recently by Reinhart and Rogoff's hugely influential book "This time is different", told them that they couldn't. The book was never convincing – it seemed to me more data-mining than analysis – and the irony in its title (the idea being that it is actually never different, and debt always leads to a macro hangover) may yet rebound on its authors (and on much of the academic economic establishment).

So it must all seem rather unfair. Not only are today's (mostly) conservative governments borrowing far more than opposition parties would have dared to, but the IMF is now positively encouraging them to do so.

However, while we agree – and have been arguing for many years – that debt levels may be more sustainable than feared, and that there is no pressing need to retrench, we nonetheless feel a little uneasy at this latest instance of institutional mission creep.

We can still imagine circumstances in which big borrowing is not tolerated. It may depend on who is doing the borrowing (or, Mr Webb, the devaluing) and why; and what the monetary counterparts to the borrowing are. Borrowing and printing together would be scary. 

And just as gross financial liabilities may not be a binding constraint on growth, they are equally unlikely to be a sustainable source of it. 

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