jueves, 18 de abril de 2019

Why does the austerity policy of the International Monetary Fund fail?


"You will know them by their fruits," says a passage in the Holy Bible, Matthew 7: 15-20 and the fruits of the austerity policies imposed on the countries by the International Monetary Fund to grant them loans are not exactly good.
The Monetary Fund starts from a basic premise: that the fiscal balance represents the fundamental condition to avoid inflation and keep the economies of the nations healthy. But that premise is false. The irrefutable proof of this is that the two countries with the largest fiscal deficits in the world, Japan and the United States, do not have inflation. This forces us to look for the origins of inflation in other causes and not in the fiscal deficit, which is why the IMF theory on the matter falls and loses its rational and logical sustenance. This then leads to the following question: what is the origin of inflation?                                                
In the book Critical Appreciation of Monetary Policy, Bolívar Oro (Monte Ávila 2007) expressed that "The main causes of inflation are: a) devaluation of currencies b) usury: exaggerated elevation of interest rates c) the excessive increase of the taxes d) the increase of the prices of the energy, especially of the oil and e) the increase of the demand before an insufficient supply "and added that" the causes of the inflation are essentially by the side of the costs and, ultimately, on the demand side. "Page 138.
1.    The economic policy measures of the IMF are incoherent
Incoherent means that they are not related to each other and oppose each other.
The policies of the International Monetary Fund fail because they employ contradictory measures such as the following; I will explain:
-       The decrease in public spending in search of fiscal balance as the IMF imposes on countries contradicts the expansion of investment and public and private consumption, because money is the blood of the economic process and what determines the stagnation, reduction or expansion of the economy. Consequently, a reduction in public spending has effects throughout the economic chain and social life.
-       The raising of interest rates to conserve or attract capitals generates the opposite effect because investors and speculators, seeing the excessive increase in rates, flee because they know that the crisis is just around the corner and very soon they will lose their money. This influences the decrease in public resources and contributes to the devaluation of the currency.
-       - The increase in the prices of public services in search of more income to balance the budget drives inflation and subtracts money from people to invest in other needs.
-       The growth in interest rates also stimulates inflation because it raises production costs and, in turn, increases credit to consumers, negatively affecting consumption.
-       - Investors and speculators seek to appropriate the most profitable companies in the countries and not the companies that give losses, consequently, when privatizing companies or public services, the State loses important sources of income and the fiscal deficit increases.
    As demonstrated in the previous paragraphs, none of the measures used to reduce or eliminate the fiscal deficit in the nations fulfill their purpose and rather have an effect totally opposite to what is intended with them; that is why the measures fail in all the countries where they are applied. The most recent example is the case of Argentina in 2018 and 2019. In this country, as a result of the adoption of contradictory austerity measures by the IMF, there was a significant augmentation in poverty, unemployment, inflation, devaluation of the currency, interest rates of usury, increase in prices of public services and fall in production and consumption according to the official statistics of Argentina.
2.    The natural tendency is to grow
The tendency of the world population is to grow; the exception is the countries affected by the demographic transition process. The increase of the population by natural evolution or by the effect of migration brings as a logical consequence the raise in needs and the consequent additional expense for the State whose obligation is to provide basic services to the population. When the national currency does not grow at the same pace as the increase in the needs of the population, the fiscal deficit appears. This is the key issue because the issuance of national currency to meet the deficit depends on the amount of available reserve currencies, monetary gold reserves and country securities (SDRs) in the International Monetary Fund.
3.    By reducing spending, recession and inflation are decreed
When adopting a policy of reducing spending for purposes of fiscal balance without taking into account the total needs of society, the economic recession is automatically induced; this happens in practice in all countries where the adjustment programs of the International Monetary Fund are applied.
The failure of these programs is not to recognize that the growth of the population generates new needs that must be addressed by the State. It is very simple: for example, if a person gains weight the logical thing is to buy wider clothing and not cut the existing one. The same happens to the nations. But the austerity measures of the IMF force countries to the contrary, that is, to cut spending.
4.    Where does the crisis come from?
The solution then is to lift up spending and not reduce it but this possibility is limited by the inability of nations to sufficiently raise their national currencies whose increase or decrease depends on their currency reserves, monetary gold or securities in the IMF.
5. The predominance of the dollar
Most of the international financial and commercial operations are carried out in the United States dollar. This fact is the determining factor of the world economy. If a country does not have enough international means of payment (reserve currencies), it enters into crisis because it must find a way to obtain them. One way is to sell, export your products to receive payments in foreign currency and the other is to borrow from the international financial system. When countries cannot increase their exports or get external loans from the private system, the situation becomes more complicated and they have no choice but to resort to financial institutions such as the International Monetary Fund and the World Bank that impose their conditions. The main one of these conditions, as has already been sufficiently explained in this document, is the search for fiscal balance because the IMF considers that this should be the ideal of the economy and the way to stop or eliminate inflation.
6.    Domestic debt and external debt
Domestic debt is the one acquired in the currency of one's own country; external debt is the contracted in the currency of another nation.
Issuers of the five world reserve currencies, dollar, euro, pound sterling, yen and yuan do not face any problem because they can sovereignly issue their national currencies that are accepted as means of payment internationally. The issuance of currency for them is internal debt. That is its great strength. The United States, for example, has a fiscal deficit of trillions of dollars and continues issuing sovereign debt, fiduciary, without sufficient support in gold but it is a debt in its own currency, that is, an internal debt. The situation is completely different for the rest of the countries of the world, which do not have enough foreign currency and are forced to borrow in the international financial system and incur external debt for which they must submit to all the conditions imposed by the lenders. That is its great weakness.
7.    The movement of capital determines the political and economic power
The ability to generate and accumulate sufficient own resources in foreign currency creates the economic freedom of the countries; the lack of it causes the opposite, that is, the dependence and economic subordination of nations to the world centers of financial power. The international economic system is specially designed to function in that way.
8.    The law of the funnel
The currencies of the five major financial powers, the reserve currencies, are fiduciary instruments, that is, based on good faith and their acceptance by the rest of the world and do not have sufficient support or obligation to be redeemed in gold as they were in the past when they were tied to the gold pattern. But the currencies of the rest of the countries are required to have sufficient support in foreign exchange and/or gold and this determines their appreciation or devaluation. It is the law of the funnel: the width part for the five reserve currencies, especially the dollar, and the narrow for the rest of the world currencies. The greater or lesser support in reserve currencies and gold determines the appreciation or devaluation of the currencies of the rest of the world. This leads to an increase in external loans from countries to strengthen their national currencies and finance their ordinary needs. For example, if a country needs to build a large highway and does not have enough money in its national currency then it asks for an external loan, in foreign currency, of course, and thus increases its external debt by making itself more vulnerable. It would be different if with its own national currency, that is, with internal debt, it could finance that highway. In a case such as the one indicated, it is justified to request an external loan only to finance the imported component of the work. Let me explain: if to build the highway you need goods or materials that must be bought abroad and you do not have the foreign currency to do so, it is justified to ask for financing that portion by an external loan but the rest of the work should be financed with resources own of the country, that is to say, with internal debt. Nevertheless, the international financial system is created especially to force the most vulnerable countries to acquire and increase their external debt.
9.    A major change in the global economy
              In my most recent book A Welfare Society, my political proposal to Venezuela (Amazon 2019) I have proposed an idea that would contribute to improving the conditions of countries with less financial resources but with valuable natural resources such as oil, gold and food. The aim is to recognize the financial value of these resources and use them as international means of payment to replace cash or acceptance of the physical exchange of those resources for other goods, that is, to create additional non-financial mechanisms to facilitate trade. A country like Venezuela, for example, that has oil, could change oil for food or medicine. And, conversely, countries that have food in abundance could change those foods for oil or other goods. This would be a useful contribution to international economic relations.
10.        Money is a creation of man
Money is a creation of man who gives it its value and, consequently, can determine how much money to emit and how much no. In the past, in times of the gold standard, the possession of gold was the mechanism used to limit the issuance of money. Now it is the possession of currencies and especially the dollar, the instrument used to control the issuance of money in the rest of the countries of the world.
11.        An important objective of the international financial system
Money should grow in the appropriate proportion to meet the needs of nations but in practice this does not happen and this leads to two extremes: misery when it is lacking or hyperinflation when it abounds.
The amount of money should increase rationally, in its fair measure, to avoid the two extremes mentioned above and this should be a central objective of the international financial system.
12.        Conclusions
- Fiscal balance is not the remedy against inflation as wrongly state the IMF; If the fiscal deficit were the main cause of inflation then countries like Japan and the US that have the highest deficit should suffer high inflation but it is not like that but quite the opposite.
- The devaluation of currencies, the alteration of the exchange rate against the dollar is the main cause of inflation in most cases.
- The IMF's austerity policy fails because it uses a contradictory method: it seeks to promote economic well-being by balancing public finances reducing the public spending but this fact affects the investment and consumption generating poverty, inflation, devaluation, unemployment and less production


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