Unclear and Present Danger

Lately, Atlas has been voicing our concern about the American economy’s ability to support  global output.  Arguably, America’s economy is currently in the best shape seen during this recovery.  Growth has been above trend for the last two quarters, employment continues to improve, and several forward looking indicators suggest further positive developments are on the horizon.  Notwithstanding the cheer within our borders, other countries remain relatively weak and are looking for support in various forms from the U.S.  One obvious form of assistance is in trade, as our economy improves and dollar strengthens, domestic consumers and businesses will likely increase their purchases of foreign goods and services.  However, America’s role within the International Monetary Fund (IMF) may not be as obvious.

The IMF is a Washington D.C. based organization that, during tumultuous times, acts as one of the final defenses against national financial crises.  If a nation finds itself unable to pay for its obligations (e.g. Greece, Portugal, Ireland, Romania, and Ukraine have all been helped in recent years), the IMF can be called in to “renegotiate” the terms of the country’s debt, but the assistance tends to require strict budgeting or austerity measures in order for the assistance to remain in place.  For now, it is the only provider of such services and is largely funded by American tax dollars.

Until recently, emerging market countries could not afford to participate in funding the IMF, so they have little to no say about the terms of the assistance they receive.  However, China has been complaining about its lack of influence within the IMF and has even proposed the Asian Infrastructure Investment Bank as an alternative institution that would not act directly in the interests of America, Europe, and Japan.

Responding to these demands, the IMF proposed giving China more clout.  In this same proposal it wishes to require higher contributions to the fund from other countries, including an additional $65 billion from America.  Here is the rub: this action requires an 85 percent approval rate from the voters within the IMF, and the U.S. has a 16.7 percent share of the vote.  Atlas doubts Congress will give it an up vote.

America’s economy may be strong enough to support weaker trading partners, but putting us on the hook for more bailouts may not be politically popular.  It appears the probability of countries needing more help from the IMF is increasing because, as you’ll see in tomorrow’s note, the increasing global use of dollar denominated loans is currently at odds with international currency market trends.  Yes, the statistics show our economy is improving, but averages mask variances within the data.  Many Americans are still trying to reach the standard of living they enjoyed decades ago.  If the additional IMF funding issue comes up, the 114th Congress may make a lasting mark on geo-politics and economics.        (by C. Cox)