By Nicholas Asheshov ✐
The IMF/World Bank AGM in Lima this past week wrapped up with an unusual contrast between confusion and organization. The organization came from, in good part, Peru. The Economist commented breezily that President Humala’s decision to make the Friday and Saturday a national holiday, thus freeing up Lima traffic, was “his best yet.” The meeting was a success, things worked, a big plus for Peru.
There was, however, deep confusion. The muddle came not from the third world, the usual suspects, much less from Peru, but from the IMF itself together with the big shot central banks, led by the Fed in Washington, The European Central Bank in Frankfurt, the Bank of England and their equivalents in China and Japan.
It quickly became clear that the international financial system, which is run by the directors and staff of the Fund, is not only dangerously unstable but that there is worse to come. The world economy, said Christine Lagarde, the Fund’s managing director, is barely growing, at only 3.1% — Fundspeak for 2.3%.
Mme. Lagarde could have added that economic growth is not actually her job. Her job, the task of the International Monetary Fund, is to provide financial stability, which is, as we all understand it, the stepping stone for a successful economy. No stability, no growth.
Instead Mme. Lagarde and others talked of the importance of increasing jobs and pay for women, for income equality, for more old age pensions and social inclusion, climate change and indigenous rights.
This is important stuff. But the job of the International Monetary Fund is to provide the world with stable exchange rates and stable interest rates, not better education and jobs for Arab women or protection for Amazonian indians.
There was no talk, or hardly any, about exchange rates, nor even interest rates. We all know that monetary policy is sleep-making. But somebody has to do it. This is the job, and the only job of the Fund. Gender equality and the rights of native peoples have nothing to do with the Fund. Mme Lagarde and her crew are paid to control exchange rates. Dollars, euros, yen, renmunbi, pesos, reales, fluctuate today as dramatically as, and more unpredictably than, oil, gold and silver. Indeed, it is often the volatile currencies that push and pull the prices of commodities and most other things besides. Tails wagging the dogs. Carpet weavers in Kazakhstan and quinoa farmers on the Altiplano see their fortunes zoom or doom if the Fed in D.C. increases, or not, $ interest rates by a quarter point..
This is exactly how it should not be. The Fund was set up 70 years ago at the end of WWII to say Never Again to the disastrous competitive devaluations and desperate inflations and deflations that followed World War I. It was these crashing swings and roundabouts that set the scene for the Great Depression and World War II.
The IMF’s job was to keep European, and later the rest of the world, exchange rates fixed or at least stable. The United States was supposed to provide dollars backed by gold. In 1971 Nixon disengaged the dollar price from gold and today’s confusion is a result.
The Fund never really knew, and as we see still does not know, what to do about exchange rates. Or rather, they always have had a theory but the theory keeps changing.
Fast forward to Lima 2015, with trillions of dollars and the others zooming beyond the control of the IMF, the Fed or anyone else. Peru has chosen this past couple of years not to devalue the Sol against the euro and the yen, and only slightly against the US dollar. Meanwhile neighbors like Brazil, Chile and Colombia have strongly devalued their pesos and reales.
Peru has over the past two years burned $24bn of its reserves to stabilize, as the Central Bank puts it, its currency and, one is to suppose, the economy. But the economy has slowed over the past 12 months to a whisker over 2%. This is just this side, of course, of full stop which is where it is heading and below. To make up an unpredicted budget shortfall, the Finance minister, Alonso Segura, is just off to Europe to sell 20-year floating rate bonds to plug a new hole in the government’s pocket. Earlier the ministry had sold $3.2bn in bonds for the same purpose.
If this makes no sense, and it does not, who is to know? Who is right? Certainly the IMF and the other experts provided no ideas, much less clear guidance.
Actually, it’s not difficult.
Until the United States, Europe and Japan put their houses in order, which is their constant advice to third world backsliders, there is not much the rest of us can do.
Nick Asheshov was editor of the Andean Air Mail & Peruvian Times during the 1970s and 1980s, and of The South Pacific Mail, Santiago during the 1990s. He was Latin America Editor of Institutional Investor, New York over the same period. He lives in Urubamba, where he writes a blog and where he has been prominent in the hotel and railway business.