IMF: A Crumbling Figurehead

The IMF has lowered its global economic forecast citing as the main fault the US-China trade debacle. It stated that Germany would be hit particularly hard as well as a number of EU countries.   China and the US would also show slowed economies… China was slated to show a growth rate of 6.2% which was lower than the previous July at 6.4%, a minimal decrease. Bbut “Both” numbers are apparently the smallest growth since 1990.   That would indicate that the global growth rate was falling before the US trade war.

So how then can the US-China trade war be a consideration when it’s impact represents such a small reduction?

And is the IMF even an accurate ‘predictor’?

In 2013, Zero Hedge posted various graphs showing the IMF crystal ball predictions regarding World Growth, US Growth and China Growth.  The quarterly revisions for China resulted in an ultimate downgrade of roughly 1.5 percentage points, for the US .8 percentage points, and for the globe .5 percentage points, which extrapolate to a margin of error of a high of 17.2%.

Not exactly a stellar Economic Opinion.

But it also begs the question if the global rate is only 3.4% average and India and China are over 6% and 8%, that means the relative weight of the value of all goods and services is flat – and these spikes from various countries don’t really have much of an impact on the global worth.   While GDP rates are important on a country by country basis, the global rate is likely only significant when measuring those countries with the highest values when marking economic health.   For example if you have five companies each earning $1 billion, and a sixth company earning $1000, if the company earning $1000 is now earning 55% more or $1550 the global impact is not relevant.

Libya has the honor of checking in with the highest annual GDP rate 55.1%, followed by Ethiopia at  8.5% and a list of Asian and African countries that follow.  The US, China and parts of the EU remain a turtle’s pace, but the Tortoise still beat the Hare.

A study done by the Heritage Foundation between 1977 and 1998 in analyzing the reliability of the IMF predictions, found that the margin of error for developing countries was tied to IMF funding.  The bias stemmed from whether a country received IMF funding with over-estimation errors being the rule.

A quick glance at Germany reveals that imports and exports are slightly down this year compared to the previous year, and external debt is at an all time high.   These measurements came ‘before’ any US trade issues.   But those numbers are relatively mirror images of all the biggest value countries – debt is at an all time high, and trade is flat.

The final analysis by the Heritage Foundation:

WEO forecasts shows the prevalence of systematic turning point errors relative to the actual value. 14 These errors take the form of consistent under- and overestimation, which are pervasive in WEO projections for output growth, inflation, and balance of payments on the current account in both industrial countries and developing regions.

Turning point errors imply that the IMF forecasts fail to capture and include crucial economic events and shocks. This failure would weaken the IMF’s effectiveness because early diagnosis of its member countries’ vulnerabilities to potential crises is critical to fulfilling the IMF’s mandate of ensuring the international financial system’s stability. Tables 1a and 1b report the results of this analysis.

So why do we listen?  Why does the market react?  Why should we care?

Because we are ingrained to believe that the IMF has reliability when in reality – they don’t.  Markets are driven by factors more relevant to money supply and interest rate projections.  The IMF really has no power, they remain a figure head that has long outlasted their initial value.  Initially created to help countries balance exchange rates and provide short-term capital to balance payments, instead, today they are a dictatorship whereby developing countries sell their souls for loans they can’t repay.

In response to the flagrant corruption within the IMF, China created the Asia Infrastructure Investment Bank in 2014, and the BRICS created the BRICS Contingent Reserve Arrangement.

Ocotber 1st, the IMF appointed a new top Economist, Gita  Gopinath born in India, schooled at Princeton, teacher at Harvard, and student of Ben Bernanke.  She is responsible for over-seeing forecasts – predictions.  Her particular proficiency would seem to be currency movements, interestingly, the same market advocated by Soros.   She has stated that the movement of currency is faulty because it is invoiced in US dollars.

The dollar is still quite strong, but a shift is the agenda.

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