Towards the end of the Second World War the United States (US) government, along with the governments of the other 43 Allied nations, put together the Bretton Woods system of monetary management which was designed to rebuild the international economic system which had been brought to its knees by the policy actions and economic events of the period embracing the two World Wars.

Amongst other institutions, the planners at Bretton Woods established the International Monetary Fund (IMF), which is an international organization that oversees the global financial system by following the macroeconomic policies of its member countries. The IMF is particularly interested in following the actions of governments where policy is likely to impact exchange rates and the balance of payments. Beyond this, the IMF offers financial and technical assistance to its members, works to facilitate exchange rate stability and, in the extreme, acts as an international lender of last resort.

 Yet, there is a profound irony in this regard. If the US were to blank out its name and present itself to the IMF for funding and advice, the IMF would have plenty to dish out to that country’s policymakers.

What Is Wrong with This Picture?

Mr. Play It Safe was afraid to fly
He packed his suitcase and kissed his kids goodbye
He waited his whole damn life to take that flight
And as the plane crashed down he thought
"Well isn't this nice..."
And isn't it ironic... don't you think
It's like rain on your wedding day
It's a free ride when you've already paid
It's the good advice that you just didn't take
Who would've thought... it figures

If the IMF applied its conventional criteria for assessing macroeconomic health, the fund would not lend to the US. To start with, the country is running a massive budget deficit – government spending will exceed revenue by an amount equivalent to 13 percent of gross domestic product (GDP) in the current fiscal year. Further, the US’s Congressional Budget Office projects the deficit will equal 9.6 percent of GDP in 2010. Whilst this is an improvement on expectations for 2009, the figure is still three times larger than the three percent of GDP figure that is regarded by the IMF and other Bretton Woods organizations as prudent. In turn, these large budget deficits are contributing to the already massive pile of US government debt – equal to US$6 trillion as things stand (or about 50 percent of GDP) and climbing fast.

There’s more. The runaway spending of the US economy over the course of the past decade has translated into a huge trade deficit. By convention, a figure of three percent of GDP would be considered prudent by the IMF and its associates. Yet the US economy is exhibiting a deficit of around five-six percent of GDP – or about twice the level considered safe for a well-managed economy.

On top of this, US monetary institutions have watched over a doubling in the money supply over the past twelve months, which is a consequence of the desperate attempt to thaw the frozen financial system. And to keep the financial system intact, the US government is nationalizing assets at a rapid pace. In the past year month, the US government has rescued what were formerly the world’s largest insurance firm and the world’s largest bank, namely AIG and Citigroup. Other examples abound. Keep in mind that the Bretton Woods institutions consider nationalization to be the enemy of long-run economic success.

Isn’t it ironic?

So, What Would the IMF Suggest? 

Well life has a funny way of sneaking up on you
When you think everything's okay and everything's going right
And life has a funny way of helping you out when
You think everything's gone wrong and everything blows up
In your face

To start with, if the US government presented its economy and policies as they stand, the IMF would not lend to the US. Further, if the IMF were to apply the same principles that it has in the past in cases that range from Jamaica to Argentina, the IMF would tell the US government that a number of policy steps would need to be taken in order for that economy to receive funding.

Amongst other things, conditions would include, in no particular order:

  • Unwinding of the government rescue packages and the associated government ownership. Nationalization and other forms of industry protection are a no-no for the IMF.
  • At the same time, the IMF would have much to say about the cronyism displayed by the US regulators and administrators with regard to Wall Street, big banks, big bonuses and the like.
  • Opening up of the economy to international competition – perhaps the agricultural sector and motor industry would be good places to start.
  • A shutdown of rampant government spending – after all, if you want to borrow money you must show that you have the ability to manage your finances.
  • A once-off adjustment to the US currency which would help to convert the yawning trade deficit into a surplus. If US citizens were horrified at the prospect of paying US$1.50 for a Euro, imagine the hard swallowing required at US$3.00 for a Euro?
  • Finally, the prudent policies brought by the IMF would require a freeze on the issuing of new money. Of course, for the US this would be a bitter pill when you own the printing press in which your international debt is to be repaid.
Take My Own Medicine? You Must Be Mad!

A traffic jam when you're already late
A no-smoking sign on your cigarette break
It's like ten thousand spoons when all you need is a knife
It's meeting the man of my dreams
And then meeting his beautiful wife
And isn't it ironic...don't you think
A little too ironic...and, yeah, I really do think...
It's like rain on your wedding day
It's a free ride when you've already paid
It's the good advice that you just didn't take
Who would've thought... it figures

What is the likelihood of this advice being given? To answer this question, we need to recognize that the US is the biggest owner of IMF shares, holding about 20 percent of the shares. Where does this leave things?

 If the US presented itself under a different name, then there is high probability that the IMF staff already would be drafting one of the organizations much-favoured structural adjustment programmes. In reality, and as suggested above, these deep structural adjustment packages entail little more than conducting a search-and-replace on the policy document. But searching for ‘Jamaica’, ‘Brazil’, ‘Russia’, ‘Malaysia’ or ‘Kenya,’ and replacing with ‘the US’, will be a bridge too far for the IMF’s biggest shareholder. I can hear the protestations already: “the case of the US is different …”.

Wouldn’t it be ironic if Alanis Morrissette were American?