Hamish McRae: The IMF’s main task is to get us back to proper rates

All right so far, but… There is a sense of foreboding in Washington at the spring meetings of the International Monetary Fund and World Bank, which started last night. This is one of the two times each year when the world’s finance ministers and central bankers gather to ponder the future, the other being the annual meetings held in the autumn.

We will get the updated IMF forecasts today when the next World Economic Outlook is published. But writing ahead of it the thrust is clear.

There is a decent economic recovery taking place, with the world economy expected to grow at nearly 4% this year and next. However, not only are there huge threats, but the very latest signs are uncomfortably wobbly. The markets have certainly had their reassessment since the most recent IMF update last January.

One of the features of IMF-think is that it is very conventional.

It has to be because its management is answerable to 189 countries and it is usually cautious of criticising its larger members. (When it went off message five years ago and its chief economist, Olivier Blanchard, said the UK’s fiscal consolidation was “playing with fire”, its attack spectacularly backfired as subsequent data showed that the UK had, along with the US, the most successful recovery of any G7 economy.)

The conventional thing now is to warn of a trade war, and last week Christine Lagarde, the Fund’s managing director, gave a speech in Hong Kong warning of “darker clouds looming” because of rising trade tensions. If protectionist forces prevailed it would be “an inexcusable, collective policy failure”. (The speech, by the way, was entitled “Fix the Roof While the Window of Opportunity is Open”, which suggests a rather dodgy way of trying to repair a roof by leaning out of a window, but you can see what she means.)

Aside from worrying about protectionism she also warned about fiscal and financial risk, and about the need to foster long-term growth that benefited everyone. We should focus on the financial risks because we are going to hear a lot more about those in the coming months. New IMF figures showed that global debt is now $164 trillion, 40% higher that it was in 2007. With the central banks printing shed-loads of money, and with near-zero (or in the case of Europe, negative) interest rates, it is hardly surprising that governments, companies and individuals have rushed out and borrowed. The finance ministers and central bankers meeting in Washington have deliberately and energetically encouraged them to do so. Why do people invest in cryptocurrencies? Because regular currencies give them such dreadful rates.

If that sounds harsh, ask yourself this: would the global recovery really not have got off the ground had the main central banks brought rates down to, say, 2% instead of zero? At present interest rates are the lowest they have been in recorded human history.

That is the thing to look for from this meeting: an awareness of the scale of the problem they have created, and a tacit understanding — let’s not ask for more — they have to nudge the world back to sensible monetary policies.

Of course there will be stuff about averting a trade war, but this is not the forum where anything will happen. Actually I think the dangers have been overplayed. Think back to the early Eighties, when it was Japan in the role of China, shamelessly copying American and European products, and flooding the world with cheap exports and erecting barriers to keep imports out. That threat was contained, partly by the Plaza Accord on currencies in 1985, which forced up the value of the yen and reduced Japanese competitiveness. The world coped then, and momentum behind international trade is much greater now.

As for Lagarde’s other bit of roof- fixing, fostering long-term growth, again this is not the right forum. Countries create growth by having sensible economic policies, as Germany brought in during the middle Noughties, and France — fingers crossed — might be bringing in now. The IMF has little influence here, and its critics would say little competence too.

There is one thing that really matters: navigating the path back to reasonable interest rates. That is under the control of the people meeting in Washington. Get that more or less right and the next downturn, when it comes, will be moderate and manageable. Get it wrong and we will be back to the situation when Lehman Brothers was allowed to collapse. As Tim Geithner, US Treasury Secretary between 2009 and 2013, memorably put it when the banking crash was inevitable: all they could do was foam the runway.