Sunday, June 4, 2023

The IMF demands a definitive solution to the debt ceiling from the United States

History repeats itself. The United States Treasury has reached the authorized debt limit and the parties are negotiating a solution against the clock. Uncertainty and the specter of a possible default creates volatility in the market and weighs down the economy. The International Monetary Fund (IMF) has urged Washington this Friday for an immediate solution to this serious problem as well as a permanent solution so that the debt crisis does not recur again and again.

After meeting with Treasury Secretary, Janet Yellen, and Federal Reserve Chairman, Jerome Powell, IMF Managing Director, Kristalina Georgieva stressed the need to find a solution at a press conference in which she presented the findings of her annual review of the US economy. have been presented.

“Achieving a good result is paramount from a global perspective. We think of US Treasury debt as an anchor for the global financial system. And this anchor needs to stay strong. So in times of significant uncertainty, the global economy don’t add a self-inflicted wound to those already suffering. There is some encouraging news that discussions are moving forward. But the world is watching and the world is saying, ‘Okay, let’s stop this. And please, what Can you think of a different way of approaching the issue?” Georgieva said.

According to the fund, stress over the federal debt ceiling could create additional, entirely avoidable systemic risks for both the US and global economies, at a time when visible stress is already present. The agency says that to avoid compounding the downside risks, Congress should immediately raise or suspend the debt ceiling, allowing the fiscal year 2024 budget negotiations to begin.

“Furthermore, a more permanent solution to this recurring conflict must be found through institutional changes that guarantee that, once credit is approved, the corresponding space in the credit limit is automatically allocated to finance this expenditure.” is provided”, the IMF said in its statement of findings.

persistent inflation

The IMF raised the growth forecast for the United States by one-tenth to 1.7% for this year, and by one-tenth to 1% for next year, compared to the April forecast. Its experts highlight that the economy has shown resistance to significant tightening of fiscal and monetary policy in 2022 and has so far avoided recession. Consumer demand has held up particularly well, initially thanks to job creation and wage growth from a lack of pent-up savings and, more recently, strong growth in real disposable income.

The crux of the coin is that the IMF estimates that inflation refuses to abate and will remain “substantially above” the 2% target this year and next. “While a long period of tight monetary policy will be needed to bring inflation firmly back on target, the fed funds rate will remain at 5.25-5.5% through the end of 2024,” it assures. These are higher interest rates for longer periods of time than the market currently expects.

The Fund warned that the broad and rapid increase in interest rates that has already been implemented may not be enough to quickly get inflation back on target. The IMF explains, “With debt held by households and businesses for relatively long periods and at fixed rates, household consumption and business investment have proven less sensitive to interest rates.”

recession risk

This creates a significant risk that the Federal Reserve will have to increase the policy rate far more than is currently expected to bring inflation back to 2%. The IMF believes that some highly-expected growth surprise is possible in the near term, but with contradictions: “This would only mean that the economy will slow more sharply at a later stage (possibly in 2024) , which will lead to a stronger recession. More restrictive monetary policy. The combination of higher interest rates in the United States, a stronger dollar and a sharp slowdown in US activity will have a significant negative impact on the rest of the world, ”he says.

In addition, according to the agency, a more aggressive increase in interest rates could reveal more serious and systemic problems than those observed to date in the balance sheets of banks, non-bank entities or companies, which it believes The “tightening of conditions” can trigger an increase in financial institution bankruptcies, worsen credit quality and increase pressure on institutions that have high levels of leverage and large short-term gross funding requirements.

tax adjustment

The IMF has warned that the United States needs fiscal adjustments to make its debt sustainable, not less than 5 points of GDP. The IMF believes that such an adjustment would be impossible if households earning less than $400,000 a year were excluded from the tax hike and no changes were made to Social Security and Medicare.

There are prescriptions for reducing losses through collection and leaves an extensive list of fund proposals. “A broad-based federal excise tax, a carbon tax, increased taxation of corporations and high-income individuals, reduction of misreported tax expenditures (such as welfare employer-provided healthcare, related to the sale of a primary residence) mortgage interest, and state and local taxes), closing tax loopholes, lowering the threshold for property taxes, and further improving the administration of the proceeds”, he concluded in his conclusion. Indicates.

And there are also proposals on Social Security and health care: Social Security benefits could be indexed to measures of inflation compared to the general CPI, such as the chained CPI, the maximum income limit for Social Security contributions could be raised, and This can be increased. Retirement age can be accelerated. Healthcare costs can be reduced through greater cost-sharing with beneficiaries and changes in remuneration mechanisms for healthcare providers.

Finally, the IMF encourages the United States to do more in the fight against climate change and criticizes the protectionist economic policy it is pursuing with its help: “The Inflation Reduction Act, the CHIPS Act and the Build Act America, Buy America are provisions explicitly designed to favor goods and services produced in the United States or North America. While these measures aim to increase the security and resilience of supply chains, these protectionist provisions hinder trade and investment. distort and risk a slippery slope that fragments global supply chains and triggers retaliatory action by trading partners.

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