On Monday the International Monetary Fund announced that it is boosting the size of its “New Arrangements to Borrow” from US$50 billion to US$550 billion.
The IMF’s primary activity since its establishment in 1946 has been to offer credit to lower-income countries suffering balance of payment difficulties. Loans have typically been provided under the fund’s “standby” facility, access to which comes with the imposition of financial discipline on the country concerned.
As the IMF’s website explains, “The [fund] can use its quota-funded holdings of currencies of financially strong economies to finance lending.” The better-off help the profligate, in other words, and ease them back onto the path of fiscal discipline. Each country contributes to such standby facilities in proportion to its IMF “quota”, which reflects the size of the members’ respective economies.
However, in addition to this well-established lending mechanism, the IMF offers two multilateral borrowing arrangements, the General and New Arrangements to Borrow (“GAB” and “NAB”). It’s the last facility, the NAB, that has just been multiplied by a factor of 11.
These arrangements are a different kettle of fish. Instead of the strong countries bailing out the occasional weak one, the GAB and NAB represent the IMF’s members lending to themselves. The IMF website spells out the borrowing arrangements’ objectives as “ensuring that the Fund can continue to provide timely and effective balance of payments assistance to its members during the current global economic crisis.” However, the Fund’s “assistance” is conditional on its member countries lending to it in the first place.
Can you see any difference between Charles Ponzi’s “postal reply coupon” scheme, Ivar Kreuger’s match empire, the Lloyd’s insurance market’s 1980s reinsurance spiral – to give three of many examples – and the IMF’s new arrangement? All are essentially pyramid schemes, dependent on new money to prop up an increasingly unwieldy structure and maintain belief in the ability to pay out. In the case of the IMF’s enlarged NAB facility, we have insolvent national governments joining together to promise to lend money they don’t have back to themselves.
This leaves a binary outcome. Either we have a hyperinflationary crack-up boom (which the behaviour of the equity markets over the last 12 months seems to point at), or a tipping over back into a deflationary spiral, with defaults on all kinds of debt – government, corporate and personal. What seems least likely is the scenario of modest, non-inflationary growth that most investors seem to be desperately wishing for.
Ultimately, the endgame of the global debt bubble will probably be another gold standard. Jim Rickards wrote recently that the US could avoid national insolvency by fixing the dollar to gold at US$5500 an ounce.
However, the centre of any new gold standard might not be in the epicentre of the previous debt bubble. Just as the establishment of currency stability (and a 600-year gold standard) in Byzantium came after (and was a response to) the Roman empire’s second and third century A.D. runaway inflation, so a new gold-backed currency may well be established in another geographical zone, probably one with better long-term economic prospects. A gold-backed yuan, anyone?