Our Hobson's Choice: Higher Taxes or Higher Inflation Via Christine Lagarde

06-02-2011 • EconomicPolicyJournal.com

Ms. Lagarde, or any managing director, could directly influence the terms of I.M.F. involvement — and based on her negotiating position to date within the euro zone, we can presume she will lean toward more money, easier terms and, above, all no losses for the banks that made foolish loans. Increasingly, it looks as though the euro-zone leadership, under French guidance, will go for the full-bailout option, in which all Greek debt is bought by the I.M.F., the European Central Bank and other euro-zone entities. This debt will be held to maturity — and any creditor who did not yet sell will be made whole (those who have already sold at a loss are out of luck). This course of action will be expensive, in terms of nominal outlays and in real risk-adjusted terms, because whatever terms Greece gets must also be offered to Ireland and Portugal. The I.M.F. may need to raise more capital or, more likely, tap its credit lines from member governments... The French want to sway decision-making at the I.M.F. in order to use money from the United States, Japan and poorer countries to conceal from their own electorate that the euro-zone structure has led all its members into fiscal jeopardy: some borrowed heavily; others let their banks lend irresponsibly and thus created a large contingent liability. The best way to hide the true cost is to have other people’s taxpayers foot the bill, preferably with the least possible transparency. Thus, euro-zone politicians have a lot at stake, and look for Ms. Lagarde to run the I.M.F. And, since the U.S. has no surplus from which to make payments to the IMF, any money going to the IMF from the U.S. will have to come via taxation, or via borrowing which is likely to be propped up by Fed purchases of most of such Treasury borrowing and, thus, highly inflationary.