EDITOR'S NOTE: We have our differences and disagreements with the International Monetary Fund’s philosophy of monetary governance, but this year’s IMF and World Bank meeting had a few takeaways worth noting. The sense of gloom that pervaded the meeting was almost as thick as the atmosphere surrounding the 2008 crisis. But what’s remarkable about it is the realization that today cannot be a repeat of our earlier crisis, even if we wanted it to be, as that would entail similar fixes to the problem. In other words, the world can’t lower interest rates unlike in 2008. Governments can’t just spend money to stimulate the economy as they did in 2008. This time, central banks will have to inflict a painful and punishing form of medicine to cure an illness that, ironically, stemmed from the last fix and continued through the pandemic. In short, the sense of foreboding that permeated the meeting halls was nothing other than the realization that central banks have truly run out of bullets, so to speak, and that a reckoning for our exuberances is what comes next.
The annual meetings of the IMF and World Bank were really back in Washington last week, following two years of being mostly (or entirely) virtual. It was not terribly festive, however.
- Instead, there is a deep sense of foreboding among the world's financial elite.
- As top Singaporean official Tharman Shanmugaratnam put it at a Group of 30 event Saturday, we have entered "an era of enduring uncertainty and fragility."
Why it matters: As the world faces a new era of high inflation, rising interest rates, constricted supply chains and geopolitical strife, global financial leaders face a situation in which the policy toolkit of the 2010s is no longer readily available.
- Fiscal and monetary policy is constrained by the pandemic, war and climate change.
The scene: In Washington last week, things looked much as they did back in 2019. Black sedans lined up at every luxury hotel and crowded gates at Dulles International Airport for the Saturday evening Lufthansa flights to Frankfurt. Banks threw fancy receptions attended by badge-wearing people in dark suits.
- But the underlying challenges have changed. The Federal Reserve and other major central banks are aggressively raising rates to try to bring down inflation, after a decade in which central banks were trying novel techniques to spur prices higher.
- Global bond markets are pricing in substantially higher rates worldwide, leaving governments and other borrowers less room to maneuver. The dollar's value has soared, stressing the entire world financial system.
- "It is very telling that the tougher the environment becomes, the easier it is for people to remember my last name and pronounce it correctly," quipped IMF managing director Kristalina Georgieva at the Group of 30 event.
Between the lines: The 2008 crisis, and the sluggish recovery that followed, were certainly painful. But economic tools were reasonably well-suited to addressing that pain.
- It was fine to spend money and cut rates when inflation was low and demand for government bonds seemingly bottomless.
- The dilemma these policymakers face now is that these problems cannot be solved by turning financial and economic dials.
- Rather, constraints like fewer workers, supply chain disruptions and war mean that central bankers feel they must inflict pain to bring down demand and, thus, inflation.
Driving the news: To a large degree, the events in Britain in the last few weeks seemed like a warning sign of what's to come in other rich countries. Bond markets essentially forced the U.K. government to back off its signature tax-cutting plans, lest borrowing costs escalate further.
- "The problem is that the supply side has shrunk, particularly the labor force, and the economy has been hit by a huge shock to national real income from the war," Bank of England governor Andrew Bailey said in a speech Saturday.
The bottom line: The world's economic challenges right now are rooted in forces that finance ministers and central bankers can't control.
Originally published by Axios.