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IMF WARNING: Rich countries deluded that austerity will help balance world debt

By Catholic Online (NEWS CONSORTIUM)
January 5th, 2014
Catholic Online (www.catholic.org)

The International Monetary Fund has issued a sobering report for the western world. In short, the analysis maintains that the world's wealthiest nations are deluded in thinking that austerity cuts will chip away at debt. The report is warning of massive write-offs and defaults in order for the world's economy to remain afloat.

LOS ANGELES, CA (Catholic Online) - According to the reports, the majority of the Western world will require defaults, a savings tax and higher inflation. Debt levels have reached their highest in more than 200 years.

Debt burdens in the First World have become extreme by any measuring stick. A wave of haircuts, either negotiated Depression Era-style write-offs or the standard mix of measures used by the IMF is required, the report argues.

"The size of the problem suggests that restructurings will be needed, for example, in the periphery of Europe, far beyond anything discussed in public to this point," Harvard professors Carmen Reinhart and Kenneth Rogoff say.

Overall, developed nations are working under the delusion that they are different from poorer nations and can therefore chip away at their debts with a blend of austerity cuts, growth, and tinkering. "Forbearance" is just another form of debt.

Advanced economies, many assume, "do not resort to such gimmicks" such as debt restructuring and repression, which would "give up hard-earned credibility" and throw the economy into a "vicious circle."

This line of thought, researchers say, rely on the "collective amnesia" of European and U.S. history. They are structured upon "overly optimistic" assumptions that risk doing far more damage to credibility in the end. This only drags on the crisis, blocking a lasting solution. "This denial has led to policies that in some cases risk exacerbating the final costs," it said.

Higher burdens are placed upon northern taxpayers with debt pooling in the eurozone. This could drag the EMU core states into a recession and aggravate their own debt and aging crises. Germany and the creditor core would do better to "bite the bullet" on big write-offs immediately rather than buying time with creeping debt mutualization, the paper argues.

Western debt burden is now so big that rich states will need same tonic of debt haircuts, higher inflation and financial repression, defined as an "opaque tax on savers" - as used in countless IMF rescues for emerging markets.

"The magnitude of the overall debt problem facing advanced economies today is difficult to overstate. The current central government debt in advanced economies is approaching a two-century high-water mark," they said.

Financial repression can take many forms, including capital controls, interest rate caps or the force-feeding of government debt to captive pension funds and insurance companies.

Some of these methods are already in use, but not yet on the scale seen in the late 1940s and early 1950s as countries resorted to every trick to tackle their war debts.



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