The IMF’s influential inflation strategy of austerity and interest-rate rises, is a class-war programme that is likely doomed even on its own terms, argues John Clarke

As both a strategist and an enforcer for global capitalism, the International Monetary Fund (IMF) has played a leading role in developing the response to the inflationary crisis that followed the pandemic. Though it uses somewhat coded language, the IMF has vigorously encouraged the move from low-interest rates and economic stimulation over to an approach that employs both punishing rate hikes and intensified austerity.

Michael Roberts has very plausibly suggested that, while the unrestrained use of such tactics ‘would clear away the “dead wood” and “rottenness of the system” for a new day, restoring profitability in the process, it would also be politically disastrous. An unbridled financial crisis and a massive economic slump would create conditions of social dislocation and raise the prospect of working-class revolt to highly dangerous levels. This is more than for which even the most hawkish figures within the power structure have the stomach.

In this context, the IMF has taken an approach that it refers to as ‘“AIM”, which stands for agility, integration, and member focus.’ The whole concept is to impose the harshest possible conditions on working-class populations so as to elevate profits but to be ready for ‘agile’ adaptations, in the event that banking crises or sudden economic downturns necessitate bailouts or bursts of stimulatory spending.

A developing plan

A recent IMF blog post shows very clearly that a great deal of thought is being put into how to refine and implement this flexible strategy. If it isn’t possible to go over to a reckless policy of ‘creative destruction’ and let the chips fall where they may, an approach that might be called ‘controlled destruction’ seems to be the best way forward. In this regard, the IMF is rather like the rogue doctor who advises brutal interrogators on how much punishment the victim can take without succumbing.

The title of the blog post, ‘Central Banks Can Fend Off Financial Turmoil and Still Fight Inflation,’ leaves little doubt as to its objectives. The writers rather smugly declare that ‘[r]egulators and central banks were able to contain contagion from the collapse of Silicon Valley Bank and other US regional banks, as well as Credit Suisse in Switzerland, without retreating on the inflation front. The same is true of the Bank of England’s actions to halt the selloff in bond markets that followed the UK government’s tax-cut proposal last September.’

Still, it is acknowledged that in ‘times of acute financial stress and high inflation … policy trade-offs are more challenging.’ The post stresses that this period is quite unlike the one after 2008 when ‘the primary question for price stability was how to support aggregate demand to avoid deflation and recession’ and the key consideration was the ‘aggressive easing of monetary policy.’

In the present situation, when the ‘pursuit of price and financial stability’ are at odds with each other, corrective measures by the central banks threaten to unleash further problems for the many banks that are ill-prepared to weather the storm. ‘Left unmitigated, these could threaten overall financial stability.’

The IMF, however, has turned its finest minds to the question of how ‘should central banks navigate this difficult trade-off?” and come up with a pearl of wisdom. ‘Conceptually, we propose to distinguish between times when financial stress remains modest and times of heightened financial stress or acute financial crises.’

The concept of ‘modest financial stress’ that is put forward shows how the IMF wants class-war interest rate levels to be maintained unless a reversal is utterly unavoidable. ‘Provided these stresses remain modest, they shouldn’t pose much of a challenge to achieving both price and financial stability objectives.’ However, if things start to come unglued, ‘the policy rate path can be adjusted, keeping output and inflation broadly on the same trajectory.’

Moreover, ‘tools other than the policy rate can be used to contain financial stress.’ This might be limited to ‘the use of relatively standard financial stability tools (which) should be sufficient in the case of a modest rise in financial stress, allowing monetary policy to focus on inflation’ This all sounds very self-assured but the wild ride in the banking sector in recent months suggests that there is much more brinkmanship and wishful thinking at work here than the writers are revealing.

When it comes to the thorny issue of ‘heightened financial stress,’ the post accepts that ‘a number of developments can create adverse nonlinear feedback loops and quickly develop into a full-blown systemic financial crisis, a process that was hastened in the recent bank collapses by technology and social media … Such an environment presents very difficult challenges for central banks.’

Even in such dire situations, however, it is noteworthy that the IMF still hopes that ‘various forms of liquidity support, asset purchases, or possibly direct capital injections’ will still ‘leave monetary policy free to maintain its focus on inflation.’ Behind the very measured and somewhat pompous wording, a grim determination to continue the class-war approach, even in the face of very considerable risks, is readily apparent.

If worse comes to worst, the demands of the agile approach will mean a reluctant, if temporary, change of course. In such a situation, ‘more prudence in raising rates is needed to reduce the risks of an adverse and potentially nonlinear reaction of the financial system. Under these conditions, while central banks should remain committed to price stability, they could tolerate a somewhat slower return of inflation to target.’ Still, the writers stress, even at the edge of the precipice, the ‘preferred course of action should be to rely on financial policies or to restore fiscal support.’

The post finally gets around to dealing with the doomsday scenario ‘when the financial crisis is acute’ and this is the point at which agility becomes a mad dash. ‘Should financial conditions deteriorate into a systemic crisis — with a sharp downturn in economic activity expected to ensue — central banks would clearly want to prioritize restoring financial stability. Central banks with high credibility could ease monetary policy.’

Having passed rather quickly over the nightmarish possibility of a ‘systemic crisis’, the post concludes by defiantly reaffirming that ‘… through the lens of our proposed taxonomy, the recent events in Switzerland, the United Kingdom, and the United States suggest that the forceful responses by authorities to heightened financial stress helped reduce financial instability and allowed central banks to maintain their inflation-fighting stance.’

Realities at work

The people who develop policy and analysis at the IMF aren’t paid to be pessimistic about capitalism’s prospects and their blog posts, though they may be sober, always strike a note of confidence. There are, however, several considerations that suggest their agile strategy of controlled destruction might not be as solid as they suggest.

Firstly, if the present inflationary crisis was unleashed by ‘supply shocks’ fuelled by the pandemic and worsened by the Ukraine conflict, we are living in a period of shocks, disruptions, and multi-layered crisis. The economic stability the central bankers are striving for is likely to prove elusive.

It is also highly likely that the IMF overestimates the long-term effectiveness of the policy tools and interventions it champions. The threat of major banking crises looms as large as ever and whole areas of major investment are in a highly precarious state. Evidence of this could be selected at random, but a timely example is to be found in the news that a major investor in San Francisco’s major downtown hotels ‘has ceased payments on a $725 million loan as it looks to reduce its presence in the city.’

This development is indicative of a vast bubble of insecure loans and shaky investments in retail, hospitality, office space, and housing that are vulnerable in the face of rising interest rates and that will provide a severe test for the IMF’s strategies around measured and manageable corrective measures.

Finally, the monetary and fiscal policies that the IMF advances are entirely focused on maintaining profitability by punishing working-class populations. In country after country, we see rising levels of militancy and social resistance. The refusal of workers and communities under attack to swallow the harsh medicine that the central bankers and IMF want to administer is the biggest threat of all to their plans for stabilising global capitalism at our expense.