Monetary and Fiscal «Stimulus» Is Undermining the Global Recovery

Expansionary monetary and fiscal policies have gone into overdrive all over the world since the beginning of the pandemic. This raises the obvious question of how long they can last before another crash follows. In its latest World Economic Outlook, from April 2021, the International Monetary Fund (IMF) is also concerned about rising macroeconomic vulnerabilities, noting that both governments and corporations are emerging from the pandemic overindebted, while financial vulnerabilities have surged. Nevertheless, the IMF’s policy recommendation remains almost unchanged: growth stimulus is indispensable and should continue to support an “inclusive recovery.” Government support should just be better targeted in order to reduce financial and macroeconomic risks. This article shows why the IMF’s recipe will not work.

Growth at Any Cost

The IMF claims that without the “unprecedented” policy support deployed during the pandemic, the contraction of the global economy by 3.3 percent last year would have been three times worse. Moreover, the government stimulus has allegedly prevented another systemic financial crisis. With an effective stimulus in place, the IMF is optimistic that the global economy will recover strongly, by 6 percent in 2021 and by 4.4 percent in 2022, and continue growing by about 3.3 percent over the medium term.

From a growth-accounting point of view, the IMF may be correct. Especially when its Fiscal Monitor reveals that a gargantuan fiscal stimulus of $6 trillion has been deployed globally until March 2021. This is a massive amount relative to a global GDP estimated at $85 trillion in 2020. Just the advanced economies have spent about 8 percent of GDP in fiscal measures in 2020 and have announced additional ones of about 6 percent of GDP for 2021 (graph 1). On top, central bank asset purchases of almost $10 trillion globally and relaxation of prudential rules for banks have reinforced already loose financial conditions and very low interest rates.

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