IMF Warns the West is Stuck in Near Depression

Thought there was some interesting thoughts in the following article:


IMF on Fiscal Consolidation

Some of the highlights:

• Based on a historical analysis of fiscal consolidation in advanced economies, and on simulations of the IMF’s Global Integrated Monetary and Fiscal Model (GIMF), it finds that fiscal consolidation typically reduces output and raises unemployment in the short term. At the same time, interest rate cuts, a fall in the value of the currency, and a rise in net exports usually soften the contractionary impact.
• Fiscal consolidation typically has a contractionary effect on output. A fiscal consolidation equal to 1 percent of GDP typically reduces GDP by about 0.5 percent within two years and raises the unemployment rate by about 0.3 percentage point. Domestic demand—consumption and investment—falls by about 1 percent.
• The model simulations also imply that, if interest rates are near zero, the effects of fiscal consolidation are more costly in terms of lost output.

Now imagine you are a country implementing fiscal austerity measures when interest rates are near zero and you cant devalue your currency.  Sound familiar?  Ever get that feeling the European vacation is going to get cheaper (as will the asking price on Greek islands).