IMF's top economist warns of another Great Depression

John Aravosis over at Americablog has a really interesting post about a warning made by the IMF's top economist.

AFP

The IMF's top economist, Olivier Blanchard, maintained that governments around the world should boost domestic demand in order to avoid another Great Depression similar to the global downturn that shook the world in the 1930s."Consumer and business confidence indexes have never fallen so far since they began. The coming months will be very bad," Blanchard said in an interview with the French newspaper Le Monde."

It is imperative to stifle this loss of confidence, to restart household consumption, if we want to prevent this recession developing into a Great Depression," he added.

John Aravosis writes about this news, and there were some interesting points he makes about the original Le Monde article.

Actually, I found the article in Le Monde, and I think the economist was even more vehement than the AFP translation. I'm also not convinced that AFP totally explained what the economist was suggesting - he wasn't just saying that we need to restart consumer demand, he was saying that governments have to consider boosting their own spending to REPLACE consumer demand, if necessary, even if it leads to larger deficits.

Here is what Le Monde says:
Dominique Strauss-Kahn, le directeur général du FMI, pousse les gouvernements à multiplier les dépenses budgétaires pour soutenir la croissance. Or, le Fonds était un grand ennemi des déficits.

Pourquoi ce revirement?

Nous sommes en présence d'une crise d'une amplitude exceptionnelle, dont la principale composante est un effondrement de la demande. Les indices de confiance des consommateurs et des entreprises n'ont jamais autant chuté depuis qu'ils existent. Du jamais-vu !...Les mois qui viennent vont être très mauvais. Il est impératif de juguler cette perte de confiance, de relancer et, si nécessaire, de remplacer la demande privée, si l'on veut éviter que la récession ne se transforme en Grande Dépression. Bien sûr, en temps normal, nous aurions recommandé à l'Europe de diminuer ces déficits. Mais nous ne sommes pas en temps normal.

What the economist appears to be saying is that governments need to consider REPLACING the loss of consumer spending with GOVERNMENT spending, if necessary, regardless of whether it leads to deficits.

Dominique Strauss-Kahn, the head of the IMF, is pushing governments to increase their own spending in order to support growth. The IMF has always been a big enemy of deficits. Why the reversal?We are facing a crisis of an exceptional breadth, the basis of which is a collapse of demand. The consumer and business confidence numbers have never fallen this much since they've first been recorded. We've NEVER seen this!...

It is imperative to curb the this loss of confidence, to relaunch it and, if necessary, replace private demand, if we want to avoid a recession that turns into a Great Depression. Of course, in normal times, we would recommend that Europe reduce its budget deficits. But these are not normal times.