Leaked IMF Report Shows Dangers For US Economy
By Daniel R. Amerman, CFA
Thursday, 11 July 2013
A confidential internal International Monetary Fund report was recently leaked to the Wall Street Journal, with the contents later being made public by the IMF. The contents of this report have major implications for Europe, but even greater implications for the United States.
Most of the press attention is being paid to the legalities associated with the report, and revolve around what the International Monetary Fund knew, when it knew it, and whether it properly acted within its charter at various points. However, what is being overlooked is the truly explosive information that comes in the form of what the IMF admitted (in this internal report to itself) when it came to miscalculations about “austerity”, and closing budget deficits.
Briefly, the International Monetary Fund and European Union did not force balanced budgets upon Greece, but only a reduction in the level of deficits.
The IMF’s economists estimated that this reduction in deficits would lead to a 5.5% reduction in the size of the Greek economy. But they were horrified to discover that in practice they were dead wrong, as it instead resulted in a 17% contraction in the Greek economy, or just over three times the damage that they were estimating.
They were also badly mistaken, as they belatedly came to realize, when it came to the impact of these deficit cuts on the official unemployment rate.
That is, the IMF had expected unemployment to rise to 15%, which was unpleasant, but a necessary part of the belt-tightening associated with austerity and reducing the levels of government deficit. In practice, however, unemployment jumped to 25%, a level grossly in excess of IMF estimates, and which also placed the entire economic theory underlying the austerity approach in jeopardy.
For the decrease in tax revenues associated with a 17% contraction in the economy, combined with an official unemployment rate of 25%, is of such magnitude that the government deficit reduction targets can no longer be met.