Continued expansion in the number of delinquent borrowers in the United States this week set off a panic for global stock markets that has pushed equity markets into a free fall, while the US dollar declined merrily against major currencies. The crisis of confidence is, however, still in its early stages, as various central banks have yet to begin the process of reducing their nominal holdings of US debt. As I wrote in previous articles, [1] the time for America’s reckoning draws ever closer.

The country’s reduced popularity abroad only complicates matters, as its excessive dependence on borrowings from the rest of the world exposes it to wild changes in sentiment. Readers with a historical bent of mind would undoubtedly remember the story of Al Capone, the country’s most famous gangster. Even with the weight of public opinion against him, not to mention the best efforts of law enforcement agencies, he was finally jailed for tax evasion rather than for any of his violent crimes. In much the same way, the United States will be held to account not so much for its unnecessary wars or its contribution to global environmental damage, but simply because it can no longer pay the bills.

Ugly sisters

Every spring, the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (World Bank) – the two so-called ugly sisters of modern finance – hold a series of confabs aimed at resolving their different mandates and examine progress. Following from the meeting last April, the two multilateral agencies commissioned an external report on Bank-Fund cooperation, the results of which were published last month. [2]

The report cites common goals for the two agencies, and recommends increased collaboration. The basic motivation for the report was the increasing criticism of the agencies, and in particular the IMF, as dinosaur-like entities that had no place in an increasingly integrated financial community globally. By recommending cooperation between the two, the idea was to perpetuate the existence of the two agencies.

As with most such reports that involve the advice of external consultants, this one is useless, mainly because it looks out to the rest of the world while ignoring the key need of the hour, namely a financial rescue of the United States itself – indeed, this could be quite timely for the next meeting, which is scheduled for next month. Using the template of IMF-led rescues of various countries in Asia and Latin America over the past few decades, I imagine below what a proposed rescue of the US could cover, exaggerating only modestly (tongue firmly in cheek for the rest of the article).

Modest proposals

The first mandate by the Fund is to ask the US Federal Reserve to raise interest rates by 1,000 basis points (10 percentage points) immediately. While the Fund recognizes that this will throw the economy into a deep recession, it notes that the result would not be worse than what happened to other countries under the IMF program, such as Argentina.

The overriding objective of the IMF program for the US is to change its economic engine from consumption to production. The agency, however, recognizes that it has been a while since Americans produced anything that they would themselves want to buy, let alone anything that the rest of the world would care for. It is therefore recommended that the US focuses mainly on cost advantages against Europe and Japan, and embark on a program to devalue the US dollar immediately.

All of America’s trading partners would need to accept lower US dollar values against their currencies with immediate effect. Adjustments would be proportional to the level of US dollar debt held by those countries. For example, while China would have to accept a 25% revaluation against the US dollar, smaller countries such as Colombia would only need to adjust by 5%. The approach to effectively increasing trade barriers will provide the Fund and the Bank with future customers among the world’s largest economies over the next few years.

US companies will be mandated to localize production so that a minimum of 50% of their sales in the US are made locally. For foreign companies wishing to access the US market, the minimum amount is set at 75%, with the exception of the Japanese, for whom the limit stands at 100%.

The Fund recognizes that expanding local production depends on the availability of labor and thus recommends the opening-up of immigration where required. Removing border controls would be a first step.

Service-sector companies such as banks will need to localize the processing of information to similar limits as mentioned for US manufacturers. This necessarily implies a reduction of outsourcing activities, which the IMF believes will hurt only a limited number of developing countries, such as India, but can be offset by the need to import more immigrants, as explained above. Balancing the government’s budget would be high on the list of the IMF’s priorities.

The Fund proposes that the government achieve budget surpluses around 1% of gross domestic product for the next five years, after which the target would be balanced budgets. It also requires the government to source at least 50% of its funding through long-term bonds, with the balance split evenly between short- and medium-term securities.

The Fund requires the US government immediately to impose a fuel duty of $1 dollar per gallon (26.4 cents a liter) of gasoline as a way of improving overall revenues. The government may also consider a secondary tax on sport-utility vehicles of $2 per gallon. With a view to improving the country’s record on sustainable development, the Bank will require former vice president Al Gore to switch off the electricity at his various homes.

Further cuts to the health-care budget are also required, such as a freeze on hospital costs at 1997 levels, decreased use of government-provided medical insurance, and implementing more lax gun control laws.

The agencies are also studying significant changes in dietary habits, proposing, for example, the mandatory consumption of fast food and carbonated non-diet soft drinks. In essence, the World Bank expects that reduced longevity would balance the US government’s budget in coming years.

The Fund will advise separately on a rescue program for Japan in coming years, the key objectives of which would be to increase consumption and decrease production. It is also noted that a merger between Japan and the US produces desirable equilibrium for both countries, achieving the IMF’s objectives in both places.

With these proposals, the Fund and Bank are enthusiastic in expecting a gradual recovery of the US economy in the next five to 10 years, while noting that neither entity is accountable nor responsible for alternative outcomes.

1. Hobson’s choice, Asia Times Online, March 10.
2. Report of the External Review Committee on Bank-Fund Collaboration, (pdf file) February 2007, International Monetary Fund.