Due to a worldwide march down miser’s lane, stubbornly pursued by financial institutions and governments, many countries’ economies are going downhill. IMF advisors have been giving advice to these countries, and they are spreading the idea of using austerity measures to get things under control. We asked economist Takaaki Mitsuhashi to explain the situation.

Takaaki Mitsuhashi, Economic Commentator

Takaaki Mitsuhashi was born in 1969. After graduating from Tokyo Metropolitan University, he worked in the foreign IT sector. He is presently active as an economic commentator and author. He has written many books including “2013 – Nen – Daitenkan suru Sekai, Gyakushu suru Nihon” (2013, The World at a Turning Point, Japan Striking Back) published by Tokuma Shoten.

“We want to keep the Euro. But please loan us the money!”

The European Central Bank (ECB) has been providing aid to Greece during its financial crisis. It is baffling, however, that after the ECB bought Greek government bonds as a relief measure, the ECB is now demanding to be paid back. The ECB is supposedly Europe’s “lender of last resort”, and Greece could default on its loans for the sole reason that it is unable to repay them.

Common sense would demand that Greece get rid of the Euro and return to its own national currency. In that scenario, it could then ideally initiate economic growth through exports.

However, if Greece were to abandon the Euro, it would default on its loans, and the German and French banks, which have been providing aid to Greece, would see their balance sheets collapse. But while trying so hard to keep Greece inside the Euro zone, these banks are also saying: “We want our money back.” This situation has not changed in two years, during which the financial crisis has continued to unfold. Germany and France are not thinking about Greece. They are only interested in protecting their own banks’ balance sheets.

All Greece can do is implement austerity measures and cut government spending. But this has already resulted in public servants losing 40% of their salaries, and unemployment, which has reached 26% overall, soaring to 57% for the younger age group. Both salaries and social security are going to shambles. Greek citizens are no longer able to make a living.

The reason for the Euro crisis being dragged out is that those who have the power to change things are not thinking about economic growth but instead are concerned with protecting their own balance sheets. The same philosophy is at the root of the IMF’s activities. As a condition for providing financial aid, the IMF demands structural reforms from countries that help them to pay back their loans.

In Effecting Structural Reforms in Korea, the IMF Has Protected European and American Banks in the Process

In 1997, for example, during the Asian financial crisis, the IMF gave financial aid to Korea. But the structural reforms it demanded as a condition for the rescue plan led to an economic structure in which profits made by Korean businesses were scooped up by foreign investors. Rather than helping Korea’s economy recover, the IMF’s actions benefitted the financial institutions that gave loans to Korea, and helped foreign investors stay profitable.

The IMF enabled foreign buyers to purchase stocks in Korean businesses. As the Korean won took a nosedive, it became extremely profitable for foreign buyers to acquire those Korean stocks. This has led to a situation in which, to this day, foreign hands hold 50% of the stocks of Samsung Electronics. Posco and many automobile makers are in a similar situation, with nearly half their stocks held by foreign shareholders. The Korea First Bank has been sold in its entirety to foreign investors, and many other big Korean banks are over 50% foreign-owned. As long as foreign investors are holding on to Korean shares, even highly profitable Korean businesses will not get a chance to help ease the burden of their country’s citizens. Foreign investors will simply keep pocketing their dividends and taking their profits abroad.

In this way, the IMF has been imposing unreasonable reforms on countries that, rather than fueling local economic development, have helped protect the balance sheets of European and American banks that have acted as creditors, which has only benefitted the foreign investors.

We Need to Counter Deflation

During a crisis, the IMF should ideally say: “We will help you achieve economic growth, and when you succeed, you can pay back your loans.” Instead, the IMF has been instructing countries to introduce financial reforms that prevent economic recovery. In times of deflation, financial reforms geared towards curbing inflation are no use. What we need are policies, which are willing to accept further deficits, and which will ensure the generation of income and the creation of jobs.

The International Monetary Fund (IMF)

The IMF is an institution founded in 1944 under American guidance. Its role is to offer financial aid to countries that experience financial difficulties. The IMF meets member countries once a year and gives them recommendations concerning their financial policies. However, the IMF’s counseling focuses more on budget-balancing rather than economic growth. It is presently typical, for example, for its advisors to push deflation-riddled Japan to raise its consumption tax. Depending on the amount of financial contributions member countries offer, they are given voting rights, but only the U.S. has veto rights, so developing countries are especially insistent of reforms of the present system.

The Dangerous Path of the Miser – Are We at the Verge of Another Great Depression?

The U.S. Is Contemplating Austerity Measures

Widespread obsession with balance sheets is one of the major reasons the world is heading straight for another Great Depression.

Responding to the financial crisis in the U.S., the FRB has been implementing monetary easing, and issuing money. Conservatives have especially criticized this policy, and said: “Too many dollar bills are being printed!” and “This is going to put us into hyper inflation!” A movement that proposes the introduction of a gold standard to keep the currency in check as more and more dollar bills are now being printed has been gathering momentum, and in Utah, people can actually use gold as a currency now.

Apart from criticism against monetary easing, voices also exist that say that the time has come to implement austerity measures. The spending cuts and tax hikes expected in connection with the “fiscal cliff” are drawing near, and both Democrats and Republicans are unwilling to move from their positions, which makes it unlikely that they will reach a timely agreement that could prevent the necessity for the introduction of austerity measures.

The Republicans’ opposition to President Obama’s welfare policy, which has resulted in major deficits, and their push towards a “small government” is partly justified, but on the other hand, the Republicans are not in favor of the public works projects, which are necessary to help the economy recover. Applying a Republican Party philosophy, which focuses solely on improving the state of its country’s wallet, could actually slow down the U.S.’s economic recovery. In America as well as in Japan, government ideologies that focus solely on protecting balance sheets are driving both countries further into the fangs of an economic crisis.

Europe Is Clamping Down on Member States’ Banks and Governments

The obsession with balance sheets is also one of the major reasons the Euro crisis has been dragging on for so long. In response to seeing several of its member countries struggle with major financial difficulties, the EU formed the European Fiscal Compact. This pact obliges member countries to keep its deficits within 0.5% of their respective GDPs, and automatically imposes sanctions on countries whose deficit rises to over 3%. This was intended to protect the finances of the member states, but it has instead led to member states being unable to implement independent measures that could have helped their economies to recover.

So far, Europe has left the supervision of banks up to member countries’ central banks, but now there is a movement towards centralizing European banking under the umbrella of the European Central Bank (ECB). But the lending of banks has already stagnated, and as this has already had an impact on business activity, the introduction of stronger control measures for banks is only going to slow down the economy further.

Governments and central banks are keeping their focus on the balance sheets. This, in and of itself, is not altogether wrong. However, uniting their fronts in a joint march down miser’s lane constitutes a fallacy of composition that is driving their countries’ economies into ruin and wreaking havoc upon the global economy.