Emerging Markets, the US Dollar, and the IMF

December 7, 2021 Updated: December 14, 2021


As more countries copy the Federal Reserve’s monetary policy without the global demand for the U.S. dollar, financing trade and fiscal deficits by printing a weakening currency, nations become more dependent on the U.S. dollar.

Neither domestic nor international citizens demand local currency, and governments continue to build large fiscal and trade imbalances believing the magic money tree will solve everything. However, as confidence in their domestic currency collapses, global U.S. dollar-denominated debt soars, because very few investors want local currency risk and central banks need to build U.S. dollar reserves to cushion the monetary debasement blow.

Implementing aggressive so-called expansionary policies almost always backfires, because the impact on growth of large spending plans is minimal, and the destruction of the purchasing power of the currency rises.

Governments always want to believe that they’ll be able to disguise their imbalances with monetary debasement, but the effect is the opposite.

It’s, therefore, no surprise that most global currencies have depreciated against the U.S. dollar even in a year of high Federal Reserve injections and commodity price rises. When a commodity-exporting country sees its currency collapse despite rising exports, you know that—again—the myth of modern monetary theory has evaporated.

As the domestic economy and currency in countries such as Brazil, Argentina, or Turkey get worse, governments turn the blame onto the International Monetary Fund (IMF).

The relationship of countries with the IMF always makes the headlines when governments have already spent the money they borrowed an




























d don’t want to return it. Interestingly, few seem to criticize the IMF when it rescues governments from their fiscal imbalances, and harsh comments only surface when the money must be paid back.

The first thing that citizens should understand is that the best kind of relationship a government should have with the IMF is the same as the one we should have with borrowing: Use it the least amount possible.

Citizens must understand that the objective of the IMF isn’t to solve the structural problems of an economy, but to provide liquidity and help governments maintain their credit position.

If a government squanders the money it has raised and destroys its confidence, that’s not the IMF’s fault. Moreover, if that government continues to increase imbalances as if funds were free and irrelevant, neither the IMF nor any other global credit entity is going to rescue it.

The IMF’s problem isn’t that it’s too demanding with governments or that it suffocates economies, but that it’s extremely benign with profligate governments and that it never stops states that solve everything by raising taxes and sinking taxpayers’ disposable income. If the IMF is to blame for something, it’s for often being too soft on extractive and confiscatory government policies.

In the last 30 years, the world has experienced more than 100 financial crises. Coincidentally, these periods of bubble expansion and subsequent crisis are driven by misnamed “expansive” government plans—by central banks increasing money supply without control; and governments tend to present themselves as the solution to the problems created by their own policies.

The IMF rarely tells governments what to do. At best, it suggests and tends to be extremely accommodative of tax hikes. For the IMF, government is the pillar of credit credibility, and public spending is rarely questioned. While the IMF does acknowledge the rising burden on taxpayers and the impact of increasing the tax wedge on growth and employment, it rarely penalizes governments that overspend and overtax. The usually excellent IMF papers and empirical analyses are almost unanimous in showing the negative impact on growth and jobs of tax hikes, and the poor, if not negative, fiscal multipliers of government spending, but the organization itself seems so scared of being called a defender of austerity that it has stopped recommending fiscal prudence.

The problem with recommending spending and borrowing in periods of low rates and excess liquidity is that, when everything explodes, governments complain of alleged “austerity” requests. When the IMF suggests moderating spending, states rebel, even if they’ve squandered previous support.

The IMF usually responds to all crises as follows:

  • By accepting the measures of governments from a constructive, diplomatic, and benign perspective.
  • By recommending liberalization measures and budgetary moderation plans that either are never carried out at all, or have been aimed, as in Argentina or the European crisis, at supporting hypertrophied state structures at all costs. Almost all the “austerity measures” implemented in the past 30 years have relied heavily on tax increases and not on reducing current spending, which further weakens economies.

International organizations rarely curb a governments’ desire for intervention, and on many occasions encourage it.

It’s true that the IMF may be wrong in its predictions, but it’s one of the most accurate international bodies and, when it’s wrong, it’s usually out of optimism, accepting the expectations of the government in office as valid.

The relationship that governments should have with the IMF is the same as the one you should have with your lawyer or your lending bank: Try to use them as little as possible.

Argentina and other emerging economies’ problems haven’t been created by the IMF. If the IMF can be accused of anything, it’s of having been optimistic about the governments’ promises.

The lesson of this crisis is that if governments want to avoid negative consequences in the future, they should ignore the siren calls that tell them to increase imbalances to “grow.” History has proven that spending and borrowing today always leads to a crisis tomorrow. Two plus two does not equal 22. The less they copy the Fed or ask for IMF support, the better.

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.

Daniel Lacalle, Ph.D., is chief economist at hedge fund Tressis and author of “Freedom or Equality,” “Escape from the Central Bank Trap,” and “Life in the Financial Markets.”