"Kee" Points with Jim Kee, Ph.D.

Last week the IMF increased its global GDP growth rate forecast from 3.3% (January) to 3.5% (4.1% for 2012). It is not the spurious precision that’s important here, it’s the direction of the change… up rather than down. Much of the impetus for stronger growth has been the actual or intended “policy easing” by  most of the world’s developed and developing (China, India, Brazil).


The other big news was the $430 billion increase in the IMF’s financial resources. These funds were contributed primarily for the purpose of helping to keep the European debt situation from causing systemic global financial risk. The list of countries that contributed – China, Japan, Russia, Saudi Arabia, Switzerland, etc. (not the U.S. or Canada) is a testament, in my opinion, to the general recognition around the world of global interdependence. When combined with recent increases in the European Financial Stability Facility (provided mostly by Europeans), the sums available now total in excess of $1.5 trillion, and that excludes anything from the European Central Bank. In the words of the Financial Times, “That is enough to rescue Spain. It ought to be enough to ensure liquidity for Italy in anything but the most devastating circumstances.”


With major elections going on in Europe, it is pretty easy to get whiplash from the newspaper headlines, but here’s what I think is the gist of the whole matter. There is a major tension that has to work its way out between solvent Europe, troubled Europe, and the rest of the world, and there’s just no smooth way for it all to happen. That doesn’t mean it won’t happen, it just means that it won’t happen smoothly. First of all, there is tension between the solvent European countries (Germany, Switzerland, etc.) and the troubled or insolvent ones (Greece, Portugal, Ireland). The solvent countries have to lend money to or bail out the troubled ones, but if they do it too casually they won’t get the fiscal reform concessions that have to be made in order for the troubled periphery to have an economic future. Second, I think there is truth to the notion that the larger the financial backstop for Europe, the less likely that it will have to be used. That’s because the financial backstop keeps interest rates or refunding rates in Europe from rising too quickly (panic), which would increase the probability of default, bank failures, and global liquidity concerns. So the funds have to be lined up to backstop the system, and they are. The Europeans have to do a lot of the heavy lifting, and they are. And finally, the troubled countries – including Spain and Italy – have to enact fiscal and labor market reforms, which they seem willing to do in practice only when threatened with withheld funds. I think that’s the pattern for the next few years in Europe.


One last thing of interest from last week: total state tax collections in the U.S. in the fourth quarter of 2011 exceeded for the first time the peak 2007 levels at the beginning of the recession. States are certainly not flush with cash (costs have risen), but I would bet that the “man (or woman) on the street” assumes that revenues are well below prior peak levels.