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In the 18th and 19th centuries, the foundation of medical "science" was based on the four body humors: blood, phlegm, yellow bile and black bile. It was thought that health was restored by purging, starving, vomiting or bloodletting, depending precisely on which ill humors were causing the sickness. Inside the International Monetary Fund today, the foundation of economic "science" is based on the three economic humors: trade deficits, budget deficits and misvalued currencies. The practitioners of economic phlebotomy (bloodletting) at the IMF believe that a nation's economic health is restored by fiscal austerity, high rates of taxation, capital controls and currency devaluation.
Imagine a modern-day health insurance company sending its bookkeepers to skulk in the halls of hospitals demanding that patients allow themselves to be bled as a condition of receiving reimbursement for their medical expenses. This is the way the IMF imposes its version of economic bloodletting on nations in economic distress.
Like phlebotomy, "IMF economics" is pure quackery as well as pure extortion: "Starve your economy with fiscal austerity, bleed it with high tax rates and purge it with currency devaluation, or no IMF loans." If you want to know where civil unrest and political upheaval will occur next in the world, if you want to pinpoint a nation whose vitality is being sapped, simply follow the travels of IMF bureaucrats as they impose their nefarious remedies on unsuspecting countries with ailing economies.
Argentina is the latest case in point. True, Argentina could make considerable reforms to strengthen its economy. However, the root of Argentina's economic problems rests with the global dollar deflation imposed on the world by the Federal Reserve Board.
Argentina linked its currency to the dollar through a currency board in 1991 to break the back of a hyperinflation and to stabilize the peso. As long as the dollar remained stable, so did the peso. But when the Fed held the dollar in short supply and created deflation to fight the phantoms of "excessive growth" and "irrational exuberance," Argentina's economy got squeezed as it was forced through its currency board to deflate the peso to keep pace with the dollar. Debt that was perfectly manageable in a healthy economy became unmanageable in a shrinking economy.
As a result, Argentina has been pushed to the brink of default on $147 billion in international loans. Along comes the IMF with $1.2 billion in hand demanding tax increases and draconian budget cuts, including salary reductions for public employees. Right on schedule, riots break out and the political system is thrown into turmoil.
The IMF also makes uninvited house calls on the healthy by holding bilateral "discussions" with member countries. A staff team visits the country, collects economic and financial information and then makes pronouncements on the state of the countries' economic health. Last week the IMF released its latest diagnosis of the United States' economy and sent stock and currency markets reeling.
According to the IMF's diagnosis, the U.S. current account (trade) deficit is "unsustainable" and threatens to send the dollar plummeting. IMF bureaucrats also expressed serious concern about the recent Bush tax-rate reductions and the prospect of future tax cuts and Social Security reforms that would establish personal retirement accounts, contending that they may cause fiscal stress by reducing budget surpluses or leading back to deficits, thus reviving the totally discredited bogey of the "twin deficits."
The current account deficit has nothing to do with the deflationary downturn that has been inflicted on the American economy by the Federal Reserve Board. And the IMF's suggestion that it may be necessary to delay the Bush tax-rate reductions and its admonition against additional tax-rate reductions is just another in a long line of bad recommendations pushing fiscal austerity to the detriment of sound economic policy.
The dollar will not spontaneously plummet as a result of current economic circumstances unless the IMF mesmerizes people into believing its false economic and monetary prognoses, which could set off panic in the currency markets and lead to speculative runs on the dollar. Already these ill-considered recommendations and policies by the IMF have caused the dollar and the stock market to fall, and a dangerous political chain reaction could be set off as a consequence.
Every time the IMF warns of a crumbling dollar, Treasury Secretary Paul O'Neill feels compelled to defend a strong-dollar policy, for fear that his silence may be misinterpreted as support of a weak-dollar policy. The time is now ripe for both the Fed chairman and the Treasury secretary to explain that the purpose of monetary policy is not to produce a strong dollar or a weak dollar but a stable dollar.
Copyright © 2001 Copley News Service