The Fund whose voice must not go unnoticed
One day after the International Monetary Fund (IMF) has raised India’s growth forecast to 11.5% for 2021-2022, its chief economist Gita Gopinath attributed the revision to the resumption of business activity much faster than expected after the lockdown, even as the country kept another wave of covid infections at bay. True. Covid cases have steadily declined, allowing us to push the boundaries of unlocking and focus on reviving our economy. She also offered policy advice on Wednesday, five days before our annual budget. Among other things, she called for significant spending on public health infrastructure and capacity, in addition to a credible divestment plan for viable state-owned enterprises and improvements to India’s bankruptcy law, as bad debts are expected to accumulate. Given the easy financial conditions that prevail, she said, banks and shadow lenders should look to raise capital. All of this must be taken into account. What we should not overlook, however, is a general warning from the IMF to the global financial system. In its report on global financial stability released the same day, the Fund signaled a “sense of complacency” that would have overtaken capital markets, as the cheap liquidity of the pandemic rescue efforts pushed asset prices to the top. new heights. A sharp correction, the report warned, was a risk that could impact more than market players alone.
The IMF report comes at a time when stocks have started to tumble from their highs, pushed as most have been by a wave of liquidity created – mostly by the United States – in response to Covid’s siege on the trade. While the idea was to make sure there was enough money to go around and save businesses and jobs, its collateral effect on asset values has been rather troublesome. So much so that market observer Ruchir Sharma described the underlying political consensus as “socialism for the rich and capitalism for the rest”. with his near-zero key interest rate intact, he pledged to continue buying bonds worth $ 120 billion per month. More than $ 3 trillion of such “quantitative easing” has already been carried out since last March. , is likely to trigger tantrums like those seen in 2013. Even the IMF report suggests that emerging markets will suffer if the success of the vaccination prompts the West to normalize its policy.
Meanwhile, the easy money has practically made Wall Street seem like a casino, best captured by Wednesday’s drama in the United States over the stock of a near-zombie video game retailer called GameStop. Given its unsuccessful efforts to pivot online, major hedge funds like Melvin Capital had defaulted on their obligations, but swarms of amateur investors rallied around Reddit and other internet platforms to accumulate there. Spurred on by bugle calls like “We can stay retarded longer than they can stay solvent,” a twist of Keynes’ famous words, they were obviously eager to cause the big short sellers to suffer losses. And they did. GameStop’s price has skyrocketed, a company with a market cap of $ 250 million to its 2020 low was now worth $ 25 billion, and Melvin had to be bailed out by his peers. For professional traders, it was a shock reversal of market power. a red flag that an asset market is malfunctioning when there is so much money to play with.
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