IMF Chief Says Nations in 'Depression' [WSJ]
By BOB DAVIS and ELFFIE CHEW
International Monetary Fund chief Dominique Strauss-Kahn said the world's advanced economies -- the U.S., Western Europe and Japan -- are "already in depression," and that the IMF could slash its global growth forecasts further. The "worst cannot be ruled out," he said.
The IMF managing director's comments to reporters after a speech in Kuala Lumpur, Malaysia, represent the most dire estimate thus far of the state of the global economy by a major political figure, and were far more pessimistic than forecasts released by the IMF as recently Jan. 28.
[Dominique Strauss-Kahn]
Dominique Strauss-Kahn
Political figures generally avoid using the word depression because of the association with the Great Depression of the 1930s, when unemployment hit 25% in the U.S. and economic output fell even more steeply. Last week, when British Prime Minister Gordon Brown used the word "depression" to describe the global economy, his aides quickly said it was a slip of the tongue.
In the U.S., chief White House economic adviser Lawrence Summers said that while the economic situation was serious, it wasn't as bad as Mr. Strauss-Kahn seemed to suggest.
"We were really in a very different situation than" the Great Depression, he said on ABC television's "This Week with George Stephanopoulos."
Since the events of the 1930s, there hasn't been a widely accepted definition of economic depression.
Former IMF Chief Economist Simon Johnson, a professor at MIT's Sloan School of Management, said the term refers to a significant contraction that lasts around five years. Under that definition, he said, Japan during the 1990s could have been classified as having been trapped in a depression.
Whatever the definition, by using the word "depression," Mr. Strauss-Kahn, a 59-year-old former French finance minister who has worked for decades on economic issues, has achieved shock value.
That could increase political pressure on national leaders on at least two fronts, Mr. Johnson and several IMF officials said.
The IMF has been campaigning for months to get governments in many countries to boost fiscal spending by about two percentage points to fight the global downturn. It has recently pressed governments again to repair their banking systems, even at a steep cost.
But it has been frustrated by what it feels is an inadequate response, especially in Europe, where governments worry that additional spending will lead to unmanageable inflation. U.S. plans have brought more applause by IMF officials.
The IMF also has also begun to campaign to double its lending war chest to $500 billion, from $250 billion. The declaration of a depression could help Mr. Strauss-Kahn pressure reluctant IMF board members to pitch in and fund that plan. The IMF is close to finalizing a deal with Japan for a $100 billion loan that could be tapped in emergencies, and plans to call on other countries with large reserves, such as China and Saudi Arabia, to make emergency loans available too.
In addition, the IMF is considering issuing bonds for the first time in its history. It's likely that such bonds would be sold only to governments or central banks; in that way, they would become part of those nations' official reserves. The holders of the bonds could sell them to other nations, though probably not on the open market. That would make the bonds a more liquid version of loans to the IMF.
Issuing bonds is seen as a more controversial measure by some IMF members, especially the U.S., Germany and the Netherlands, which prefer to keep the IMF on a tighter leash by limiting its ability to lend. |
