IMF Tells Investors Hold Your Optimistic Horses

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The Short of It: The IMF is warning that debt is a problem and something that will be an issue in the present and the future. Yet markets have pushed stock valuations to elevated levels. Their enthusiasm and appetite for risk assets like stocks have pushed stock prices past their pre-pandemic levels. This is frightening to many financial experts. The phenomenon extends over to SPACS, crypto currencies, real estate, and other asset classes as well.

The IMF on US Stimulus Measures

The International Monetary Fund noted that the United States took on necessary stimulus efforts but also note that these efforts can create significant financial long-term harm to economies across the world. The IMF notes that while the United States stimulates its economy with various financial packages that can create positive affects in the present, it can present negative situations in the future.

Indeed, the organization is noting that it is necessary for representatives of central banks around the world to focus on targeted stimulus efforts to negate potential economic dangers in the near term. The two elements they fear are the “debt overhang” and “financial vulnerabilities”.

Yes, stimulus measures are necessary but they must be selective, lest they endanger economic growth. The organization must balance the need for relief with the need for fiscal discipline. It is far from simple as many nations are already under the crushing weight of debt due to various causes over the past decades.

IMF Says Carefully  Stimulate The Economy

While the organization lauded the United States for its significant stimulus efforts and notes that it could spur global economic activity, dangers quite certainly lurk. For instance, employment levels across various key nations are down. Debt is at all time highs for many in key categories. Finally, other deflationary elements hang in the economic air. At the same time, while the real economy seems anemic, stock markets and asset prices rise.

If this positive sentiment fueled by debt gets out of hand during a time where more nations report increased COVID-19 cases, that poses significant problems. For instance, people are not able to pay obligations, from rent to credit card debts, it poses another problem. It is concerning, especially in a time where governments are continually injecting stimulus programs around the world.

The key question is, when will the stimulus stop? Will it keep going for another year or more? The latest look at the dollar index shows that the dollar is still strong relative to other currencies. This takes away from the narrative that hyperinflation is taking place.

Still, it does bring other questions to the forefront. The IMF noted in 2019 that it expected slow or no growth over the next few years. In 2020, the world was gripped by the corona virus. Governments responded to the COVID-19 crisis by locking down, significantly slowing down economic activity, and ensuring that citizens were supported by stimulus programs.

While leaders at the IMF may not think that the stimulus payments and programs could become a crutch as an increasing amount of people rely on governments to survive, more financial experts are wondering how the greater economy will come back.

The fact is that one cannot pin hopes on the vaccines while using central banks to purchase government debt. How much longer can governments stay accommodative without inviting a great deal of risks?