The International Monetary Fund And The Future Of World Finance

by: John M. Mason


World trade and finance are changing and the IMF is going to play more and more of a role in this future.

Christine Legarde, current head of the IMF is up for re-election and she seems to be the perfect person to lead the IMF...and the world...into this future.

Investors must take account of the changing global financial structure when building their investment strategies for the future.

Christine Legarde, the current head of the International Monetary Fund, is unopposed to continue as the head of the IMF for another five years.

The next five years, I believe, will be crucial ones for the international financial system, the International Monetary Fund, and for the world.

The next five years, I believe, will see more and more calls for the international participation and the international cooperation of governments and central banks all over the world.

The crucial factor behind these statements is that the free flow of capital throughout the world has changed the nature of financial markets and had made it almost impossible for countries to function just as independently governed sovereign nations when it comes to economics.

It has been argued that flexible exchange rates are sufficient to handle the free international flows of capital so that nations can continue to conduct their economic policies independently from all others.

However, this does not seem to be the case in these early years of the twenty-first century.

Nations are not allowing their currencies to carry the burden of economic adjustment and their efforts to use exchange rates to help them achieve their domestic economic goals just creates the opportunity for currency wars and for national confrontations.

World economic growth has been revised down and down and many analysts and policy makers are talking about price deflation in many areas. Several central banks have taken interest rates into negative territory.

Falling commodity prices are placing enormous pressures on emerging nations and on debt-laden energy companies. Currency reserves are being diminished in China and Saudi Arabia.

So what's going on that Ms. Legarde will have to face?

Well, major on the list, in my mind, is the situation of China and the Chinese currency, the renminbi. Over the past couple of years, Ms. Legarde has been a strong supporter of China and the inclusion of the renminbi in the IMF's designation of reserve currency status. She has also supported the growing role of China in world trade and finance.

The biggest issue for China is continued reform. China must become an equal participant in the global economy, but has a ways to go to reach that goal. China needs a mentor that it can trust and Ms. Legarde can play such a role in helping China make the changes it needs to make in order to fully operate within the world system. And, in continuing to move in this direction, China must not revert to capital controls in order to stem its loss of currency reserves.

Second, the world has moved into new territory and must adjust to slower economic growth and lower commodity prices. The current problems stem from the boom-and-bust period that many of the emerging nations experienced over the past decade or so.

Early on, these emerging nations got pumped up through world credit easing as the United States and others attempted to get out of economic and financial crises. An asset bubble was created in the commodity area and this bubble was exacerbated through a huge buildup of debt to support the boom.

Now, the other side of the expansion must be faced. Commodity prices have tanked and debt is ubiquitous. Now, Brazil and Russia are in recessions. Argentina faces major financial stresses. Venezuela is on the brink of bankruptcy with annual inflation around 750 percent. Nigeria is already asking for help in resolving its problems. And, South Africa is on the edge.

The question is, how large is the safety net for all these situations and how wide a role can the world play in taming down the disruptions that might take place.

Then there is the European situation. The Eurozone faces many hurdles to its success. Yesterday, we found out that the annualized rate of economic growth in the European Union for the fourth quarter of 2015 was 1.2 percent. This rate was taken as encouraging.

But, major problems still persist that many think will bring down the EU. Greece still has major issues. A question relates to how much of a role the IMF might play in the future of Greece finances. In the current flow of funds to safe havens, longer-term Greek debt has jumped up to 11.50 percent. Again, one of the major issues in Greek recovery is the reform of the economy.

But, Italy is not out-of-the-woods yet, and France is having its problems. Spain and Portugal are also still shaky. Reform is one of the major issues in each one of these countries.

Finally, there is the issue of exchange rates. A discussion of the world's exchange rate structure, I believe, will have to take place within the next five years or so. For one thing, there are just too many currencies in the world. But, an elimination of currencies into fewer "common" currencies faces the problems that the European Union is facing. So, where do things go?

I favor the re-election of Ms. Legarde as the head of the IMF. This next five years is going to require, intelligence, experience as well as an ability to solve things pragmatically. I believe that Ms. Legarde brings these things to the table.

This kind of leadership is going to be needed to make the changes that need to be made.

If one accepts that this kind of change is coming to the world, then one needs to incorporate this fact into one's investment strategy. Things are going to be different. Thus, how one invests one's money must take these changes into account.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.