The IMF is blowing smoke - Big Time!

Debt is good!

Sat, Sep 4, 2010 - 2:05pm

The IMF is telling jokes again. Too bad they aren't funny and are, in fact, dumping gasoline on the problem of debt resolution around the world.

This week's Economist (one of my two favorite news magazines - the other being The Week) published what I first took to be an ironic snicker at a recent IMF paper. Turned out, it wasn't a joke at all except for those who can deflect the powerful misinformation that economists of most stripes put out. Turned out The Economist wasn't greatly impressed either.

The IMF essentially says that government debt doesn't matter. Believe it or not, with some magically idiotic calculations, they issued a graph that shows the PIIGS and other countries have not, as yet, pushed the debt problem anywhere near disastrous levels (or as the IMF calls it, the "theoretical limit").

Source: IMF and The Economist 9/4/10

The IMF "calculates", although the formulae are not specified, that exceeding 100% of GDP in government debt is not to cause ulcers. As you can see from the graph above, even Greece, currently at slightly more than 150% debt/GDP ration can still borrow up to "a theoretical maximum" of 200% debt/GDP without the world coming to an end. What happens when the "theoretical limit" is punctured is not specified.

They do admit, however, that before that point is reached, selling bonds might become problematical in that those buyers of bonds may not behave like the IMF's formulae and stop buying them.

For some reason, Ireland, which is currents just under100% of GDP could continue to borrow up to 250% of debt/GDP ratio before the aforesaid theoretical limit is reached.

The good old USA can keep up the money printing to 185% of GDP before the world comes to an end.

Why each county is different is not fully nor factually explained except by saying "each country is different" in the way it reduces (or not) its debt. Big insight, that.

What the IMF is basing their calculations on (whatever they may be) is government debt. It does not include private debt, unfunded liabilities and unsecured (and mostly worthless) assets now on the books of the central banks.

Add all those up and for the USA, some 6 trillion, and our current situation only jumps to a debt/GDP ratio of 16/1 or almost 900% of debt/GDP ratio over the IMF mystery math theoretical limit.

That means we are so far off the chart to the right hand side, we can never find our way back onto the chart again. To me, debt is debt. It matters not a whit whether it is government, private or public. Debt will be repaid by one of three ways; pay it back in real money that's worth more than the paper it's printed on; barter it away by trading assets of real worth to retire it; or defaulting on the the whole debt. It will be paid, in our case, sooner than later.

The real problem is that Governments the world over will use these IMF bogus theoretical figures to continue justifying more of the same old BS, just digging us in deeper and deeper until the game comes to a shuddering halt with all of us left hanging out to dry in a rain storm.

These IMF "calculations" are not worth the ink the reports are printed on and neither is the economics behind them.


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