Wednesday, November 12, 2008

Worldwide Inflation

"The International Monetary Fund will offer as much as $100 billion in a new kind of loan to countries that are battered by the financial crisis, making available new cash to help ease the world credit crisis. ... That makes it potentially easier for crisis-hammered countries such as Mexico, Brazil, and Korea to shore up cash reserves, their currency, and their ability to help ailing companies as shaken foreign investors withdraw. ... Late Tuesday, the IMF unveiled a $25 billion package of loans organized for Hungary. That package and a $16.5 billion loan for the Ukraine require painful belt-tightening in exchange for help. The Fed also took new steps to flood dollars into markets outside the U.S., where banks' unwillingness to lend has left foreign firms without dollars they need", my emphasis, WSJ, 30 October 2008.

"'That the perceived probability of default for any industrialized country could be that high is extraordinary,' said Simon Johnson, a professor at MIT Sloan School of Management and a former chief economist of the [IMF]. 'Emerging markets go through this all the times. But these are rich, prosperous economies.' ... The divergence in bond yields points up that even though the euro-zone nations share a currency and a monetary policy administered by the European Central Bank, investors still price the countries' creditworthiness individually", my emphasis WSJ, 31 October 2008.

Hungary and the Ukraine need belt-tightening, but Uncle Sam doesn't. The Fed floods dollars into Europe and people keep their life savings in them.

Why should a country's credit rating depend upon whether or not it uses the Euro? Currency is only a numeraire. Before 1914 most countries were on the gold standard. Why should each of them have had the same credit rating? The IMF is another institution the world could do away with, with no adverse consequences.


Anonymous said...

Maybe investors pricing Euro sovereigns individually is a demand side thing where some institutions have mandates to buy only that countries debt... that would impact

The Fed is a sailboat that has let out all of its largest sail in the hopes of catching some wind... the sea is flat... the boat is starting to drift... rudderless... no wind comes... now what?

Anonymous said...

PS: numeraire = A+ (best word of the day)

Anonymous said...

IMF gives credit to third world countries that have almost no controls at all how the money is spent.

Independent Accountant said...


I would shut the IMF. It's another money waster.