What a (no) difference years of failure make….

I spent a few minutes reading this account of Olivier Blanchard (OB) on what went wrong in 2011. OB claims to have the four reasons which explain why a year which started in moderate but hopeful recovery mode ended with “the recovery in many advanced economies at a standstill, with some investors even exploring the implications of a potential breakup of the euro zone, and the real possibility that conditions may be worse than we saw in 2008”. His reasons are these:

  1. There have been “self-fulfilling outcomes of pessimism or optimism, with major macroeconomic implications”.
  2. “Incomplete or partial policy measures can make things worse”.
  3. “Financial investors are schizophrenic about fiscal consolidation and growth”.
  4. “Perception molds reality”.

OB’s analysis is surprising considering the disastrous failures of the IMF interventions since its conception, its recent victim being Greece. I said this elsewhere:

The IMF dictates the pace in the Greek crisis by sending intellectually mediocre, excel sheet operating, economic fundamentalists with no idea about how the real economy works. With tools of high school sophistication they destroyed whatever still worked in the real economy making naive assumptions about eventualities which would cost the job of every business consultant in any company anywhere in the world.

What OB does is to bring in subjectivity by means of self-fulfilling pessimism and perception. This subjectivity is at the core of what real economies are made out of and it is exactly what the IMF closes its eyes to when applying their disastrously naive and amateur recipes. In fact the only narrative which explains the schizophrenic discrepancy between OB’s analysis (OB is Economic Counsellor and Director of the Research Department of the IMF) and the IMF economic fundamentalism is to read OB’s text as IMF patriotism. Points 1 and 4 blame the “economic agent” for being irrational and hence insusceptible to IMF excel sheet treatment, point 3 blames the Markets for demanding the impossible conjunction of austerity and growth (causing the IMF to look like a fool) and  finally point 2 is clearly a jab at the eurozone leadership whose non credible responses to the markets just served to make facts out of speculations.

There was a time human sacrifice was used to “please or appease gods, spirits or the deceased” and even when humanity gave up on the practice it hang on to it in symbolic ways, as can be seen, for example, by the symbolism in the “blood and flesh” communion of Christianity. What made this type of irrationality persistent is the lack of counterfactuals:

Would it have been any better or worse without the sacrifice?

IMF orthodoxy uses economic austerity as a mass human sacrifice to appease the markets which to most politicians and even some economists have many of the properties of gods and spirits. As always the luck of counterfactuals is what makes this type of practice persistent. In a few decades this type of IMF economic practice and the macroeconomics which underlies it will be looked back with the same disdain as we look back on human sacrifice now.

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