Forecast Calls For Higher Taxes

Today, the Toronto Star tells us that:

OTTAWA–The International Monetary Fund says most countries will need to raise taxes to pay off the trillions of dollars they spent fighting the global recession.

IMF chief economist Olivier Blanchard says in an article to be published today that governments acted properly in ramping up spending to stop the worst slump since World War II.

Soon, he says, nearly all countries will have to raise taxes to pay the recovery bill.

I'm not sure why the IMF has to publish an article in order to inform the public of this fact. How else were governments expected to pay for these stimulus programs?

Blanchard, meanwhile, says with the recession virtually over, what is left are deep scars that will take years to heal.

He sees positive growth for most countries in the next few years, but says it will be sluggish.

“The recovery has started,” Blanchard says in the paper released by the Washington-based lender.

“The crisis has left deep scars, which will affect both supply and demand for many years to come.”

In many countries, the potential exists for economies never to return to where they stood before the recession hit, Blanchard states.

I disagree that the recovery has started. None of these officials can point to one sector of the economy that is actually experiencing significant growth, not even the government sector under their control. Nor can they rebut the myriad facts that point towards the economy worsening, not recovering. The only bright point is the ongoing stock market rally. However, the stock market is driven more by investor psychology than by economic fundamentals. For whats it worth, the stock market in China just officially entered a bear market.

A rebalancing among nations is also needed, the IMF says, with countries like the United States increasing imports and economies like China increasing exports.

I'm assuming this is a typo or I'm just reading it wrong. Rebalancing would involve the U.S. increasing exports and China increasing imports, but the chance of that happening is close to nil right now.

Fiscal deficits could feed "worries about U.S. government bonds and the dollar ... causing large capital flows from the United States," Blanchard added.

"Dollar depreciation may take place, but in a disorderly fashion, leading to another episode of instability and high uncertainty" that could derail recovery

No joke: President Obama just raised the 10-year budget deficit projection to $9 trillion from approximately $7 trillion. It's pretty obvious that taxes are going to have to be raised to cover this increasing deficit. As for the fate of the dollar, I covered that in a previous post.