IMF – Why the spike in food/oil price is different from 2008

Wondering if history is repeating? IMF thinks that there are significant difference between the 2008 food/oil price spike and the one we are experiencing now in 2012. Main argument is that volatility is not the same as then and there is no uniform development across crops.

The analysis is sound in my mind. While I do not believe that the “IMF cure” is what we need with its focus on inflation as the only remedy. IMF acts like the surgeon who said “The operation was a success but the patient died”

However, one good point is that governments should reduce tax on food as a way to reduce the impact of a volatile food market.

Judge for your self:

http://www.imf.org/external/podcast/2012/Foodprices.mp3

The Spanish decease

Mariano Rajoy en Bilbao. Imagen tomada por Ike...

Mariano Rajoy en Bilbao. Imagen tomada por Iker Parriza (Photo credit: Wikipedia)

What has the Spanish government done until now? Well on the 11th of July prime minister Rajoy announced the following steps with the endorsement of the IMF.

  • The standard VAT rate was raised from 18 to 21 percent and the reduced rate from 8 to 10 (the super-reduced rate was left unchanged at 4 percent). A number of products have also been moved from lower to higher rates. Other indirect taxes will also be raised.
  • The extra payment in December to civil servants was suspended for 2012 – equivalent to nearly a monthly wage.
  • The mortgage income tax deduction will be removed.
  • Unemployment benefit was reduced (with the replacement rate after six months falling from 60 to 50 percent).
  • Social security contributions are reduced by one percentage point in 2013 and a further point in 2014.

With a unemployment rate of 25% and 50% among the young there are plenty of issues to be confronted. However. There are little signs in the Spanish governments actions to suggest any efforts to stimulate new job creation or any investment that will take the country out of recession. It would seem that they only thing that they are capable of is digging the hole even deeper.

China in for a soft landing

After years of two digit growth figures in China the economy is about to slow a bit down for what IMF believes will be a soft landing. The main drive for this change is the situation in Europe, which does not seem to improve anytime soon. However, the domestic Chinese market seems to be a driver.

What is the difference between the crisis of 2011 and the one in 2008?

DAVOS/SWITZERLAND, 25JAN07 - Christine Lagarde...

Image via Wikipedia

We have another crisis looming here in 2011. The Greek economy is on the verge of collapse and many of the countries in southern Europe are in deep structural difficulties and we just do not have the options available that we had in 2008. But there are some key characteristics, which might help us pull through.

One might be that a lot of the stronger economies have pulled their resources and have made huge budget cuts. Here explained by Christine Lagarde director of the IMF.