IMF: We Need $1 Trillion to Stave Off ‘1930’s Moment

“The Sydney Morning Herald” reported last week that the International Monetary Fund is seeking $1 trillion to stave off a “1930’s moment.”  This from the article[1] (emphasis added):

THE world will face a “1930s moment” of the kind that brought on the Great Depression unless money can quickly be found to support nations such as Italy and Spain, the International Monetary Fund says.

Before releasing dramatically downgraded economic forecasts early this morning Australian time the IMF chief, Christine Lagarde, told an audience in Berlin $1 trillion would be needed to support ailing governments and stave off a deeper crisis – half of which would have to come from Fund backers such as Australia.

The Treasurer, Wayne Swan, backed Ms Lagarde, saying without “larger firewalls” to protect embattled European nations the global economy was at risk.

But the shadow treasurer, Joe Hockey, questioned whether such payments were in Australia’s national interest.

The IMF has shaved three quarters of 1 per cent off its previous global growth forecast, issued in September. It expects the world economy to grow by 3.25 per cent this year and advanced economies 1.2 per cent. China would grow 8.2 per cent, down from 9.2 per cent. The euro zone would shrink 0.5 per cent before growing weakly next year.

But Ms Lagarde said the world was facing “a 1930s moment, in which inaction, insularity and rigid ideology combine to cause a collapse in global demand”.

“This is a defining moment,” she said. “It is not about saving any one country or region. It is about saving the world from a downward economic spiral.”

The IMF economic update warns of “adverse feedback loops” in which countries that have trouble paying debts cut spending further, depressing their economies even more, making it harder to repay their debts and imperilling financial institutions worldwide.

I believe that Ms. Lagarde is correct – about one thing.

The world is facing a 1930’s style moment due to excessive debt levels and, in my view, there’s no avoiding it.  On my radio show, I have had the pleasure of interviewing Mr. Ian Gordon of The Long Wave Group.  Mr. Gordon has expanded on the work of a Russian economist named Nikolai Kondratieff who concluded that economies cycle through 4 sub-cycles over time, typically taking about one lifetime to move through all 4 sub-cycles.  Here are the 4 sub-cycles labeled by season and the approximate dates of the last sub-cycles:

The Spring Cycle.  During spring, an economy experiences a gradual increase in business and employment.  Consumer confidence gradually increases.  Consumer prices begin a gradual increase compared to levels seen during the previous cycle (the winter cycle).  Stock prices rise and reach a peak at the end of the spring cycle.  Interest rates begin to rise from historically low levels and credit gradually expands.  At the beginning of the spring cycle overall debt levels are low.  (In our view, this most recently represents the time frame of 1949-1966)

The Summer Cycle.  During summer, an economy sees an increase in the money supply which leads to inflation.  Gold prices reach a significant peak at the end of the summer period.  Interest rates rise rapidly and peak at the end of the summer.  Stocks are under pressure and decline through the period reaching a low at the end of the summer cycle.  (In our view, this most recently represents the time frame of 1967-1982)

The Autumn Cycle.  During autumn, money is plentiful and gold prices fall reaching a gold bear market low by the end of the autumn season.  During autumn there is a massive stock bull market and much speculation.  Financial fraud is prevalent and real estate prices rise significantly due to speculation.  Debt levels are astronomical.  Consumer confidence is at an all time high due to high stock prices, high real estate prices and plentiful jobs.  (In our view, this most recently represents the time frame of 1983 – 2000)

The Winter Cycle.  During winter, an economy experiences a crippling credit crisis and money becomes scarce.  Financial institutions are in trouble.  There are unprecedented levels of bankruptcy at the personal, corporate and government levels.  There is a credit crunch and interest rates rise.  There is an international monetary crisis.  There are pension funding problems and the price of gold and gold related equities rise.  (In our view, we have been in the winter cycle since 2001)

Simply stated, we are currently in the winter sub-cycle and policymakers around the world are doing the only thing they know how to do, throw money at the problem.  There are two very important issues related to that:

One:  By trying to solve a debt problem by adding more debt, the ultimate size of the problem that needs to be solved grows and dealing with the pain of excessive debt levels is postponed.

Two:  Countries like Australia, with lower debt levels that could assist countries with higher debt levels have few logical reasons to do so.  And, the problem is simply too large.

The good news is that once the debt is dealt with, a new ‘season’ will follow.  The bad news is that it will, in my view, take awhile to get there. 


[1] Martin, Peter.  January 25, 2012.  “IMF seeks $1 trillion to stave off ‘1930’s moment.’”  http://www.smh.com.au/business/world-business/imf-seeks-1-trillion-to-stave-off-1930s-moment-20120125-1qg7z.html

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