The IMF warned today that current estimates of $400-600 billion in economic losses worldwide in the wake of the mortgage crash in the United States are likely to be well under the mark. The IMF predicts final worldwide losses on the order of $1 trillion.
The IMF releases its biannual World Economic Outlook on Wednesday and already has said it would cut half a percentage point off its forecast of 2008 global economic growth, to 3.7 per cent.
The unusually harsh biannual report, particularly critical of Wall Street, comes ahead of the IMF and World Bank spring meetings in Washington over the weekend.
The IMF, whose stated mission is to maintain global financial stability, said there was a collective failure to appreciate the extent of debt taken on by a wide range of institutions - banks, insurers, government-sponsored entities and hedge funds.
Like a sort of inverse ponzi scheme in which debt is sold around in a big circle until everyone is holding onto their share of nothing, the global finance market has overextended itself and is now likely to radically overretract itself in response.
On the note of debt-laden entities, the IMF is planning a sale of 12.7% of its gold stock, an amount that should be worth about $6 billion. This sale has to be approved by quite a few member nations within the IMF, including us, so it's not yet a sure thing.
The funds from the IMF's gold sale would be used to buy US government and corporate bonds to generate income and plug a $400m shortfall in funds that is projected over the next two to three years.
It is part of a dramatic overhaul of its income model, which has over the past 60 years been reliant on lending to poor countries to support its role as the supervisor of the world economy.
But the need for its emergency loans has tailed off in the past decade as many developing economies, particularly in Asia, have built up large reserves of foreign currency to reduce the risk of a future crisis.
This also prompted the IMF to make $100m of spending cuts from its budget over the next three years to 2011.
Notice how the previously poor countries no longer need emergency aid quite so often, as they're building up reserves. Sounds smart.