This time the IMF has chosen to focus on the dangers of rising protectionism, and this time and for once, it is right. This really is the most serious threat facing the global economy in a very long time.
The IMF has got it wrong more times than I care to mention. But I will mention some of the occasions. There was the 1997 and 1998 bailout of the Asian tigers and the Russian economy – which sent the economies it was meant to be helping into deep recession and sowed the seeds for many of the problems affecting the world today. There was its extraordinary announcement in 2006 that the advent of mortgage securitisation reduced the odds of a banking crisis – now that really was a bad faux pas. I have often wondered how it managed to stay together after getting that one so wrong. Then there was the rescue of Greece and the Eurozone and its repeated warnings that George Osborne’s austerity posed a major risk to the UK’s economic recovery.
It is not uncommon to accuse the IMF of being guilty of groupthink.
Well, I have news, we are all guilty of groupthink, it is an inevitable part of being human. And that includes the critics of the IMF.
It is not fair to blame the IMF for the Eurozone troubles, these were troubles largely of the region's own making, and the IMF often took a more sympathetic approach to the Greek crisis than the rest of the backers that made up the so-called Troika.
As for the UK and austerity, hold on a second. In the IMF’s latest outlook, it has the UK currently growing faster than any other G7 economy, so a superficial analysis suggests its criticism of Osborne’s austerity was wrong.
But the world is now facing a far more serious crisis and austerity across much of the world, seen earlier this decade, is partly to blame.
To borrow words from the IMF, describing its own report, it has “raised the spectre that persistent stagnation, particularly in advanced economies, could further fuel populist calls for restrictions on trade and immigration.”
Its chief economist, Maurice Obstfeld said that such restrictions would hamper productivity, growth, and innovation – well there’s an understatement.
He said: “It is vitally important to defend the prospects for increasing trade integration…Turning back the clock on trade can only deepen and prolong the world economy’s current doldrums.”
There I most emphatically agree.
Ever since the 2008 crisis, there has been a constant danger that the world will lurch back into protectionism, just like it did in the 1930s.
Policy makers across the world have been too complacent. Rising inequality is real, and wherever you stand on the ideology of this, rising inequality leads to popular discontent and that can lead to the rise of demagogues. We saw it in the 1930s – when by the way inequality also rose sharply – and I fear it might happen again.
There are deep, deep forces at work. Globalisation has not caused the issues that are leading to social discontent, but the failure of policy makers to grasp the issues and agree on global regulation has meant that globalisation has exacerbated it.
For many years the global economy has suffered from a chronic lack of demand. Attempts to fix this, via such measures as QE and record low rates, have failed because they were too timid. We needed helicopter money, across the world, five, six, or even seven years ago.
Globally debt has been rising, this is largely a function of the global savings glut. When savings rise, either debt rises too, or that money effectively drains out of the economy. When governments impose austerity at a time of rising global savings, then the only way the global economy can carry on growing is via private debt rising.
When people warn that debt is the big threat to the global economy, they confuse cause with effect.
And now we face the biggest challenge yet
The Brexit vote was not necessarily a vote for the UK to turn in on itself. But there is a no doubt that a sizable minority of Brexit voters has precisely that outcome in mind.
In the US, Donald Trump advances the cause of protectionism, but then Hilary Clinton’s rival for Democrat candidature during the primaries, Bernie Sanders, was also anti-free trade. Mrs Clinton herself, for a long time, a supporter of globalisation, has become a cynical on free trade, and maybe the biggest criticism aimed at her is that people don’t believe her, they say her track record shows she supports globalisation, and that is the track record that may yet sink her political ambitions.
The IMF has been wrong before, but this time it is right. And the ultimate effects of protectionism will not be pretty.