It’s the issue the world’s leading economic policy makers and thinkers are talking about. Why are they so obsessed? Well, they’re not quite sure.
Exit strategies, or how to go about paying off the massive debts run up fighting the financial crisis, are part of almost every discussion here in Turkey’s financial capital, where officials from 186 countries converged for the annual meetings of the International Monetary Fund and the World Bank.
Thing is, almost no one thinks it’s time to exit.
Finance Minister Jim Flaherty made clear during a panel discussion on fiscal policy Saturday that he has no intention of backing away from his economic stimulus program.
At another presentation, Mr. Flaherty’s French counterpart, Christine Lagarde, said “we are not out of the crisis yet,” even though economic indicators generally show that the worst is over and the IMF said earlier this week that the global economy is growing again.
The concern is that the growth is fragile, fed only by government spending. Mr. Flaherty called private demand “modest” and Ms. Lagarde said she still is waiting for business and investors to “kick in” and replace what the governments of the Group of 20 nations have been doing.
“The whole focus on exit strategies doesn’t make sense,” said Jim O’Neill, chief economist at Goldman Sachs Group Inc., who predicts the global economy will expand about 4 per cent next year, which is a relatively optimistic assessment.
Said Niall Ferguson, a professor of history and business at Harvard University and an authority on the Great Depression: “Withdrawal of stimulus could be fatal.”
Despite the near universal assessment that taking the global economy off life support would be a mistake, there remains pressure to do something about the massive debts that countries have run up rescuing financial institutions, bailing out automotive companies and paying for job-generating infrastructure programs.
Some investors fear all the spending will lead to run away inflation, and have demanded higher yields on government bonds to guard against the risk. Mr. Flaherty and the Obama administration face heavy criticism from their political opponents for running up deficits that were previously under control.
What is emerging through all the talk of exit strategies is a clearer indication of what policy makers want to see to feel comfortable enough to unwind stimulus measures.
IMF Managing Director Dominique Strauss-Kahn said earlier this week that the proper time to reduce government spending and raise interest rates is a few months before unemployment peaks.
Ms. Lagarde said she too is “riveted” to the French unemployment rate.
For his part, Mr. Flaherty is looking for signs of sustained economic growth.
“We need evidence of sustained growth over a couple of quarters before we start implementing exit strategies,” Mr. Flaherty said.
When that moment arrives, Mr. Flaherty said he is hopeful that economic growth will end the deficit within five or six years. If growth doesn't work on its own, Mr. Flaherty said he will trim program spending.
But he stressed that this is the wrong time to implement exit strategies. So far, Canada’s economy hasn’t demonstrated evidence of one quarter of sustained economic growth, although the Bank of Canada predicts the economy resumed expanding in the third quarter.
"The evidence of private demand is modest," Mr. Flaherty said.
