Then the manager replaces the £5 he stole from the toff’s wallet. His Lordship decides the room is not at all like Hampton Court Palace and leaves.
So, goods were produced. Services were rendered. Debts were paid. There were economic outputs. GDP — in theory — increased. And all due to one lousy £5 note. That’s a multiplier for you.
One more thing: in all instances, credit was extended. You could consider the aristocrat the government. Or a bank. Except, unlike governments, banks don’t give away money; they rent it out.
Meanwhile, back at the IMF…
Blanchard calculated that the IMF utilised a multiplier of 0.5. In reality, it should have been 1.5. In the IMF’s defence, Blanchard argues that the Fund underestimated the extraordinary financial circumstances of the European economies. In other words, the IMF was too optimistic about the impact of austerity measures upon GDP, and did not expect the effect upon unemployment would be so severe.
In a sharp response to critics, Blanchard’s report also notes that:“Some commentators interpreted our earlier [findings] as implying that fiscal consolidation should be avoided altogether. This does not follow from our analysis. The short-term effects of fiscal policy on economic activity are only one of the many factors that need to be considered in determining the appropriate pace of fiscal consolidation for any single economy.”
In other words, Blanchard doesn’t find that fiscal consolidation is the incorrect prescription, but that individual economies need to find the correct policy mix to ameliorate the worst effects of fiscal discipline.
Casino capitalism
Blanchard’s paper shows that the OECD, the EU and the Economist Intelligence Unit all got their forecasts wrong. The IMF was just – well – even less accurate.
But that merely reinforces the point that economics is an art. But a black art, rather than a bad art. Consider the Reserve Bank’s last three interest rate cuts: did you pick them? How about the Australian dollar exchange rate over the last quarter? Or Apple’s share price?
If so, what are you doing here? Why aren’t you playing the global casino? You should have five Bloomberg screens in your living room, a pile of cash a kangaroo couldn’t jump over, and a super-yacht in Antibes.
The difference between private firms and international organisations such as the IMF is that the Fund is not attempting to profit from its forecasts. More accurately, it makes policy prescriptions and offers technical advice. In this instance, it recommended fiscal consolidation.
Now, I fully expect the harbingers of austerity doom (Krugman et al ) to come out of the woodwork any minute now, although they have not been returning phone calls since the Eurozone failed to implode, as predicted. And, despite serious, long-term problems, Greece has not departed the Eurozone either. This prediction by Citigroup in 2012 should leave you rolling in the aisles:
“Greece WILL leave the eurozone on January 1, 2013.”
About as accurate as a Mayan calendar.
