IMF warns ‘trillions’ in US net worth vulnerable to recession

Leaders need to fix broken economic models: Lagarde

WASHINGTON, Oct 10, (AFP): A severe recession would slash US public wealth by about $5 trillion, causing vastly more damage to Washington’s finances than just an increase in debt and deficits, the IMF has warned.

Yet governments around the world, many of which face similar dangers, do not clearly publicize their overall net worths, the International Monetary Fund said in a new report.

This creates a potential blind spot for policymakers who could use this knowledge to head off economic risks, it said.

Left to right: Managing Director of the International Monetary Fund (IMF), Christine Lagarde, World Bank President Jim Yong Kim, Director-General of the World Trade Organization (WTO), Roberto Azevedo and Secretary-General of the Organization for Economic Co-operation and Development (OECD), Angel Gurria, attend a trade conference introduction at the International Monetary Fund (IMF) and World Bank annual meetings in Nusa Dua on Indonesia’s resort island of Bali on Oct 10. Finance ministers and central bankers from 180 nations are among 32,000 attendees in Bali for the annual meeting of the International Monetary Fund and World Bank from Oct 9 to 14, which takes place every three years outside of Washington. (AFP)

The global crisis lender, which in Indonesia this week is staging its annual meetings with the World Bank, cut its outlook for global GDP on Monday by two tenths to 3.7 percent through next year.

The fund pointed to rising trade tensions as a cause for worry and also predicted slower growth in the United States next year and beyond.

Economists now say the chances of a recession in the United States are growing due to several factors, including trade tensions and mounting interest rates.

Beyond tax revenues and sovereign debts, a government’s balance sheet contains a range of other assets and liabilities, such as the state enterprises, land and natural resources it owns as well as the money it has to pay to fund public-sector employee pensions.

The difference between the two sides of the ledger is a country’s net worth.

“The scars from the global financial crisis are still evident on public wealth a decade later,” the report said, adding that the net worth of 17 advanced economies together was now $11 trillion lower than it had been prior to the crisis.

Countries that take such a broad approach to their finances may face lower borrowing costs and see higher revenues, making them more resilient in a downturn, the report said.

But after a decade of recovery, the net worths of most Group of Seven economies are now negative, it said.

China’s net worth has deteriorated to eight percent of GDP because of off-budget borrowing by local authorities and poor returns from powerful government-run businesses, the IMF found.

Meanwhile, the net worth of the United States has been in decline for nearly four decades. Worsening notably due to the global financial crisis, it had sunk by 2016 to negative 17 percent as a share of GDP, the report said.

The federal mortgage giants Fannie Mae and Freddie Mac, which the government took over during the crisis, have lent a staggering amount – 44 percent of GDP – to the private sector.

But the biggest source of risk comes from state and local government retirement pensions, which can lose money when Wall Street sinks – meaning the shortfall has to come out of local government budgets.

Towns and states then have to cut spending elsewhere, creating a drag on the economy.

Nationwide, such pension funds are already underfunded by about eight percent of GDP.

Using a hypothetical “stress test” scenario developed by the US Federal Reserve for banking regulation, the IMF found a severe recession would cut the value of America’s publicly held assets by an amount equal to 26 percent of GDP by 2020.

Also: NUSA DUA, Indonesia:

World leaders need to fix global trading systems instead of trying to tear them down, International Monetary Fund chief Christine Lagarde said Wednesday, in a rebuke to nationalist politicians pushing tariffs and protectionism.

Her comments come as a trade spat between China and the United States threatens economic growth around the world, with IMF experts warning of “new vulnerabilities” in the global system.

“We need to work together to deescalate and resolve the current trade disputes,” Lagarde said at an IMF and World Bank gathering in Bali.