The horizon is not so far as we can see, but as far as we can imagine

Tag: IMF

A Few Words About Argentina

Okay, so Argentina elected a neoliberal president. He went to deep austerity, removed capital controls, and sought an IMF bailout.

Now it looks like a socialist may win and markets are freaking out, because he may default on some of the debt and re-institute capital controls.

Argentina’s problems have a long history, but it’s worth remembering this: Before WWII, it was a first world country, with a standard of living about equal to Canada’s.

Argentina partially defaulted in 2001. We should remember that that default was caused by following the conservative policy of pegging the Peso to the dollar, which any moron should have known would eventually backfire.

It is also worth remembering that, when Argentina defaulted in 2001, it wasn’t actually allowed to. American courts wouldn’t let Argentina pay the creditors who allowed their debt to be reduced unless they also paid those debtors who didn’t take the deal.

We live in a stupid, perverse world where people don’t understand that there has to be a balance between debtors and creditors. Creditors are making a bet, and if they lend to the wrong entity, and that entity eventually can’t pay back the debt, they should have to eat their losses. Don’t lend to people who can’t pay you back. Everyone knew that Argentina was going to have debt problems, every time, but they took the chance because they wanted high returns.

But the central financial system, the NY and London courts, and the IMF act as debt collectors for people who want the upside of high payments from distressed borrowers without the downside of possibly losing the money.

Worse, they act as enforcers for bad actors, who won’t cut deals, and expect to litigate.

Debtors may lose some money, but leg-breaking countries for rich debtors kills and impoverishes poor people.

Now, none of this is to say Argentina hasn’t made mistakes. Flipping back and forth between neoliberals and socialists is stupid. Pick one, and suck it up. Electing Macri was stupid, but then being outraged when he does what a neoliberal technocrat would do (i.e., austerity and sucking up to the IMF) is equally stupid.

Pick a governing philosophy and elect governments that adhere to that philosophy until the leading parties all follow it (like when Labour became neoliberal under Blair, cementing Thatcher’s victory).

Right now, Argentina is getting the worst of both worlds.

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The Destruction of the Third World

The first thing to understand is this: 3rd world GDP growth in the post-war liberal period (roughly 46-68 or so), was good.  It was above population growth in most cases.  That changed around about the time OPEC grabbed the West by short and curlies, squeezed and wound up with tons of money they didn’t know what to do with.  This is an act in three parts:

ACT 1: Banks Loan Money to Third World Countries

Lots and lots of it. The pitch is this: we know how to develop countries. You’ll borrow this money, invest in development and have more than enough money to pay off the loans. Except that they didn’t know how to develop countries and even those countries in which the leaders didn’t steal the money, the loans grew faster than the tax base, leaving governments less and less able to administer their own countries.

ACT II: Money, Money, Money and Cash Crops

So, you need $.  Foreign dollars.  How do you get them?  You could do what Japan, Korea, the United States and Britain all did, and develop real industry behind trade barriers, of course, but that’s not what the experts are telling you to do.  What they’re saying is “you have a competitive advantage in certain commodities: cash crops and maybe minerals. You should work on that.”

Most cash crops are best grown on plantations, so if you want to move your economy to cash crops, you have to move the subsistence farmers off their land.  That means they will go to the cities and need food that you no longer grow (since you’re growing cash crops to sell to Westerners.)  But hey, that’s ok, because with all the foreign currency you’ll be getting from bananas, coffee and so on, you’ll be able to buy that food from Europe and America and Canada.  Right?  Right!

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Except that everyone is getting this advice, and everyone is growing more cash crops, and the price drops through the floor and you have a thirty year commodities depression.  You can’t feed the people you’ve shoved off the land without taking more loans; there are no jobs for those people, so now instead of self-supporting peasants you’ve got a huge amount of people in slums.  But, on the bright side, while not enough hard currency has been created to develop, or even stay ahead of your loans, enough exists so that the leaders can get rich; the West can sell grain to you; and you can buy overpriced military gear from the West.  Win!  For everyone except about 90% of your population.


The above was standard IMF and World Bank advice, of course.  Don’t let anyone tell you that the World Bank or IMF want a country to develop; their actions say otherwise.  What they do need to do is push neo-liberal doctrine.  So, now that your country is vastly in debt and can’t feed itself without foreign food which must be bought in hard currency, the IMF says “well, we could give you more money, BUT”.

The but is that they want you to stop subsidies of food and let food prices float.  Then they want you to reduce tariffs on goods, even though tariffs are a huge source of tax revenue, because your government is crippled and your people have tiny incomes, so you really don’t have the ability to tax them.  Then they want you to open up your economy to foreigners buying it up, so foreigners can own every part of your economy worth having (anything that generates hard currency, basically.)


After all this your country is a basket case.

Win, Win, Lose.

(This was the great commodities depression. It ends about 1998, but the vast debt overhang remains in most cases.)

Originally published October 10, 2014. I can’t write this any more succinctly than this.

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Ukraine’s Unelected Government Imposes IMF Austerity

This is perhaps best article on what actually happened in the Ukraine and Crimea: the story is a little different than what you’ve been hearing on TV or reading in the newspapers, at least if you’re in most of the West.  The author does leave out some bits (like the Tatars boycotting the Crimean referendum), but overall it’s accurate.

Meanwhile the new PM in the Ukraine is imposing IMF austerity measures, like removing subsidies on Gas (50% increase) and cutting pensions (50%) cut. He says he’s on a Kamikazee mission.  That’s because he’s not elected, so he can do thing that an elected leader could never do.

Which is to say: there is a coup, backed by a popular uprising in the capital, which puts in place an unelected government, which does things that elected governments repeatedly refused to do.  The East and South of the country, which voted in the last elected government, is unhappy with this.

It’s really hard to conclude that Crimea didn’t do the right thing for most of their population by joining Russia.  50% increase in natural gas prices and 50% cut in pensions?  Would you stand still for that? Oh, and the average pension in the Ukraine is—$160/month.  $80 after it’s cut.

The last government may have been a bunch of corrupt assholes, but it’s hard to conclude that taking Russia’s deal of 15 billion dollars and subsidized gas wasn’t, actually, a better deal for most Ukrainians than approximately the same amount of money from the West + IMF austerity.  And these are only some of the measures: the civil service will be slashed, the government natural gas company will be privatized (meaning even higher prices down the road), the ban on selling agricultural land to foreigners will be lifted, and so on.

The EuroMaidan’s legacy won’t just be losing Crimea, it will be turning the Ukraine into Greece.

If I were Crimean, I would have voted yes in the referendum. Russia’s a corrupt oilarchy run by a near-dictator, but it has a stronger economy and better standard of living than the Ukraine, and that’s before the IMF gets through with the Ukraine.

I don’t know what Putin’s going to do.  If NATO membership were truly off the table, he’d be best served by doing nothing more.  Let the Ukrainian’s destroy their own economy through IMF austerity, and in a few years, at least the eastern half of the country will be begging to join Russia.

However, if NATO membership is on the table, and it seems to be, Putin may feel he has no choice to invade.  Problem is, after the West lied to Gorbachev about not expanding NATO, could Putin believe any Western promises if they were given?

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The 2012 IMF/Ukraine Negotiations

These are the reform the IMF wanted for a 4 billion dollar loan:

the IMF demanded that Ukraine double prices for gas and electricity to industry and homes, that they lift a ban on private sale of Ukraine’s rich agriculture lands, make a major overhaul of their economic holdings, devalue the currency, slash state funds for school children and the elderly to “balance the budget.”

This is what the IMF does to your country. Note that 4 billion doesn’t even come close to covering Ukraine’s debts.  Moscow offered 15 billion and a one-third reduction in natural gas prices.

If the Ukraine wants something close to prosperity, this is a sideshow.  The first thing they have to do is destroy their own oligarchs: take away their money and power.

But remember how the West squealed when Putin brought his oligarchs to heel?  Or at Venezuelan redistribution?  Oligarchs are even more sacrosanct in the West than the East.  The IMF would never allow the Ukraine to destroy their oligarchs and throw them all in jail.

The next step after that would be solidly reorient to China.  They want Ukraine’s food, and  the Chinese are willing to pay a premium for the resources they buy, at least by developing world standards (and that this point, that’s what Ukraine is.)  What, exactly the Ukraine thinks it will sell the West is beyond me: their Soviet era factories don’t make anything we want, and the West heavily subsidizes its own agricultural production.

4.1 Trillion of Losses?

american-dollar-toilet-paper1The IMF put losses at 4.1 trillion today. As a friend noted, that needs a couple of big caveats:

  1. Losses to this point.  Not losses that are yet to occur.
  2. Losses that people are willing to admit to.

But losses should slow down now that firms no longer have to mark assets to market. Mark to fantasy is very forgiving.  As we’ve seen in the last bit, with bank after bank declaring profits, mark to fantasy can turn almost any firm around.

IMF Now Estimates Losses To Grow To 4 Trillion

The odd thing about this is that 4 trillion is the number I’ve been hearing as the banks own estimate of their losses for a few months now, I even mentioned it back in February.

If the banks think their losses are 4 trillion, that means the total losses are higher, and the worldwide losses are much, much higher.

Numbers are still being lowballed.  Now that doesn’t mean that 4 trillion will necessarily have to be spent by the federal government, the move to mark-for-market accounting, which allows banks to keep assets on their books until marutity at calculated prices, for example, will reduce how much money the government has to spend to keep banks from actually going under.  The Geithner plan, if it works, is likewise intended to inflate asset prices through the miracle of leverage, and that will reduce perceived losses.  If lucky, it might even reduce eventual nominal losses, by holding the assets to maturity and praying really hard that they don’t default, and that by maturity the market and economy are a lot stronger.

Still, all in all, my guess is that the IMF is still underestimating the issue.  In fact, it’s not even clear if there’s enough free money in the world to absorb all the real losses, but I suppose if everyone keeps printing enough money, we can get there.

Calculated Risk via Atrios

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