422 Fed can bail out State governments by buying municipal bonds

Fed can bail out State governments by buying municipal bonds

(1) Fed can bail out State governments by buying municipal bonds
(2) Blanchflower: The Fed Should Buy Munis And Monetize State Debt
(3) Quantitative Easing Is Only Show in Town: David G. Blanchflower
(4) Ben Bernanke needs fresh monetary blitz as US recovery falters
(5) IMF fears "an explosion of social unrest" from unemployment

(1) Fed can bail out State governments by buying municipal bonds

From: Ellen Brown <ellenhbrown@gmail.com> Date: 18.12.2010 04:33 PM

Central Banking 101: What the Fed Can Do as 'Lender of Last Resort'

Ellen Brown

December 16, 2010

http://www.huffingtonpost.com/ellen-brown/central-banking-101-what-_b_798004.html

We've seen behind the curtain, as the Fed waved its magic liquidity wand over Wall Street. Now it's time to enlist this tool in the service of the people.

The Fed's invisible hand first really became visible with the bailout of AIG. House Speaker Nancy Pelosi said in June 2009:

Many of us were, shall we say, if not surprised, taken aback when the Fed had $80 billion to invest -- to put into AIG just out of the blue. All of a sudden we wake up one morning and AIG has received $80 billion from the Fed... So of course we're saying, Where's this money come from? "Oh, we have it. And not only that, we have more."

How much more -- $800 billion? $8 trillion?

The stage magician smiles coyly and rolls up his sleeves to show that there is nothing in them. "Try $12.3 trillion," he says.

That was the figure recently revealed for the Fed's "emergency lending programs" to bail out the banks.

"$12.3 trillion of our taxpayer money!" shout the bemused spectators as pigeons emerge from the showman's gloved hands. "We could have used that money to build roads and bridges, pay down the state's debts, keep homeowners in their homes!"

"Not exactly tax money," says the magician with his mysterious Mona Lisa smile. "When did you have $12.3 trillion in tax money sitting idle?"

Not only did he not use "tax money;" it seems he hardly used "money" at all. He just advanced numbers on a computer screen, amounting to credit against collateral, replacing the credit that would have been advanced by the money market before the Fatal Day the Money Market Died. According to CNNMoney:

The Federal Reserve made $9 trillion in overnight loans to major banks and Wall Street firms during the Wall Street crisis... All the loans were backed by collateral and all were paid back with a very low interest rate to the Fed -- an annual rate of between 0.5% to 3.5%...

In addition to the loan program for bond dealers, the data covered the Fed's purchases of more than $1 trillion in mortgages, and spending to back consumer and small business loans, as well as commercial paper used to keep large corporations running...

Most of the special programs set up by the Fed in response to the crisis of 2008 have since expired, although it still holds close to $2 trillion in assets it purchased during that time. The Fed said it did not lose money on any of the transactions that have been closed, and that it does not expect to lose money on the assets it still holds.

Or so it is reported in the media.

The pigeons slip back up the sleeve from whence they came, a sleeve that was empty to start with.

The Central Bank as Lender of Last Resort

Where did the Fed get this remarkable power? Central banks are "lenders of last resort," which means they are authorized to advance as much credit as the system requires. It's all keystrokes on a computer, and the supply of this credit is limitless. According to Wikipedia:

A lender of last resort is an institution willing to extend credit when no one else will. Originally the term referred to a reserve financial institution, most often the central bank of a country, that secured well-connected banks and other institutions that are too-big-to-fail against bankruptcy.

Why is this backup necessary? Because, says Wikipedia matter-of-factly, "Due to fractional reserve banking, in aggregate, all lenders and borrowers are insolvent." The entry called "fractional reserve banking" explains:

The bank lends out some or most of the deposited funds, while still allowing all deposits to be withdrawn upon demand. Fractional reserve banking necessarily occurs when banks lend out funds received from deposit accounts, and is practiced by all modern commercial banks.

All commercial banks are insolvent. They are unable to pay their debts when they come due, because they have double-counted their deposits. A less charitable word, if this hadn't all been validated with legislation, might be "embezzlement." The bankers took your money for safekeeping, promising you could have it back "on demand," then borrowed it from the till to clear the checks of their borrowers. Modern banking is a massive shell game, and the banks are in a mad scramble to keep peas under the shells. If they don't have the peas, they borrow them from other banks or the money market short-term, until they can come up with some longer-term source.

Ann Pettifor writes, "the banking system has been turned on its head, and become a borrowing machine." Rather than lending us their money, they are borrowing from us and lending it back. Banks can borrow from each other at the fed funds rate of 0.2%. They get the very cheap credit and lend it to us as much more expensive credit.

They got away with this shell game until September 2008, when the Lehman Brothers bankruptcy triggered a run on the money markets. Panicked investors pulled their short-term money out, and the credit market suddenly froze. The credit lines on which businesses routinely operated froze too, causing bankruptcies, layoffs and general economic collapse.

The shell game would have been exposed for all to see, if the Federal Reserve had not stepped in and played its "lender of last resort" card. Quoting Wikipedia again:

A lender of last resort serves as a stopgap to protect depositors, prevent widespread panic withdrawal, and otherwise avoid disruption in productive credit to the entire economy caused by the collapse of one or a handful of institutions...

In the United States the Federal Reserve serves as the lender of last resort to those institutions that cannot obtain credit elsewhere and the collapse of which would have serious implications for the economy. It took over this role from the private sector "clearing houses" which operated during the Free Banking Era; whether public or private, the availability of liquidity was intended to prevent bank runs.

...[T]his role is undertaken by the Bank of England in the United Kingdom (the central bank of the UK), in the Eurozone by the European Central Bank, in Switzerland by the Swiss National Bank, in Japan by the Bank of Japan and in Russia by the Central Bank of Russia.

If all central banks do it, it must be okay, right? Or is it just evidence that the entire international banking scheme is sleight of hand? All lenders are insolvent and are kept in the game only by a lender-of-last-resort power given to central banks by central governments -- given, in other words, by we-the-people. Yet we-the-people are denied access to this cornucopia, and are forced to pick up the tab for the banks. Most states are struggling with budget deficits, and some are close to insolvency. Why is the Fed's magic wand not being waved over them?

QE3: Some Creative Proposals

According to financial blogger Edward Harrison, that might soon happen. He quotes a Bloomberg article by David Blanchflower, whom Harrison describes as "a former MPC [Monetary Policy Committee] member at the Bank of England but also an American-British dual citizen professor who is very plugged in at the Fed." Blanchflower wrote on October 18:

I was at the Fed last week in Washington for one of its occasional meetings with academics...

The Fed is especially concerned about unemployment and the weak housing market. ...

Quantitative easing remains the only economic show in town given that Congress and President Barack Obama have been cowed into inaction.

"Quantitative easing" (QE) involves central bank purchases with money created on a computer screen. Blanchflower asked:

What will they buy? They are limited to only federally insured paper, which includes Treasuries and mortgage-backed securities insured by Fannie Mae and Freddie Mac. But they are also allowed to buy short-term municipal bonds, and given the difficulties faced by state and local governments, this may well be the route they choose, at least for some of the quantitative easing. Even if the Fed wanted to, it couldn't buy other securities, such as corporate bonds, as it would require Congress's approval, which won't happen anytime soon. [Emphasis added.]

You don't need to understand all this financial jargon to pick up that a central banking insider who has sat in on the Fed's meetings says that for the Fed's next trick, it could and "may well" fund the bonds of local governments. Harrison comments:

The Fed can legally buy as many municipal bonds as it wants without congressional approval... This is a big story. Blanchflower is essentially saying that the U.S. government can bail out both the housing market via Fannie and Freddie paper purchases and the state governments via Muni purchases. And, of course, the banks get to dump these assets onto the Fed who will hold them to maturity. I guarantee you this will have a very nice kick since it is the states where the biggest employment cuts are.

A big story indeed, opening very interesting possibilities. The Fed could use its QE tool not just to buy existing assets but to fund future productivity and employment, stimulating the depressed economy the way Franklin Roosevelt did but without putting the nation in debt at high interest to a private banking cartel.

The Fed could, for example, buy special revenue bonds issued by the states to finance large-scale infrastructure projects. They might build a high-speed train system of the sort seen in Europe and Asia. The states could issue special revenue bonds at 0% or 0.5% interest to finance the project, which could be repaid with user fees generated by the finished railroad. The same could be done to build modern hospitals, develop water projects and alternative energy sources, and so forth. All this could be done at the same extremely low interest rates now afforded to the banks, saving the states enormous sums in taxes.

Wouldn't that sort of program be inflationary though? Not under current conditions, says author Bill Baker in a recent post. He notes that over 95% of the money supply is created by bank lending, and that when credit is destroyed, the money supply shrinks. The first round of QE did not actually increase the money supply, because the money printed by the Fed was matched by the destruction of money caused by debt default and repayment. To replace the debt-money lost in a shrinking economy, the Fed has already elected to embark on a program of quantitative easing. The question addressed here is just where to aim the hose.

Closing the Social Security Gap

Another interesting idea for QE3 was proposed by Ted Schmidt, associate professor of economics at Buffalo State College. Writing in early November, Schmidt anticipated the cut in social security taxes now being debated in Congress. Worried observers see these cuts as the first step to dismantling social security, which will in the future be called "underfunded" and too expensive for the taxpayers to support. Schmidt notes, however, that social security is a major holder of federal government bonds. The Fed could finance a $400 billion tax cut in social security by buying bonds directly from the social security trust fund, allowing the fund to maintain its current level of benefits. Among other advantages of this sort of purchase:

[I]t does not raise the gross national debt, because it simply transfers bonds from one government entity (the Social Security trust fund) to a semi-government entity (the Fed); and... it gives the Fed the extra ammo (treasury bonds) it will need when the time comes to restrain inflationary pressures and pull reserves out of the banking system. (It does this by selling bonds to banks.)

Schmidt concludes: "Enough is enough, Dr. Bernanke! It's time to inject the patient with money that gets into the hands of working people and small businesses."

The Fed's lender-of-last-resort power has so far been used only to keep rich bankers rich and the rest of the population in debt peonage, a parasitic and unsustainable endeavor. If this power were directed into projects that increased productivity and employment, it could become a sustainable and very useful tool. We the People do not need to remain subject to a semi-private central bank ostensibly empowered by our mandate. We can take our Money Power back.

(2) Blanchflower: The Fed Should Buy Munis And Monetize State Debt

http://www.creditwritedowns.com/2010/10/blanchflower-the-fed-should-buying-munis-and-monetize-state-debt.html

Edward Harrison

19 OCTOBER 2010 22:47 ET

A few months ago I was running through some out of the box thinking for how the Fed might be able to give quantitative easing more of an impact. Not that I think the Fed should go QE, but if they do, the question is what should they do. Here’s what I came up with: The Fed could buy municipal bonds.

There has been a lot of talk about the anti-stimulus being provided by states and local municipalities (see Federal largesse was countered by state and local cutbacks). I have noted on a few occasions that Illinois and California bonds are trading with a high degree of default risk. But Michigan is up there too. New York has serious problems as does New Jersey to name the largest and most problematic states. Most every large state in the union is in fiscal trouble, which is why I have been warning that municipal bonds should be labelled buyer beware.’

But what if the Federal Reserve started QE2 with munis as the asset class of choice for credit easing? When the European experiment threatened to unravel, the ECB chose the nuclear option and stepped into the breach to start buying up the debt of its weakest debtor states. Now, the ECB claims these actions are unsterilized i.e. it is not just printing money.  But, I have my doubts. In any event, the ECB is the New "United States of Europe" as Marshall Auerback puts it. And while the limited measures the ECB has taken have not caused the credit spreads or interest rates to decline for these debtors, I guarantee you a full effort of credit easing would do.

-ECB credit easing by buying debt from Greece and Spain analogous to Fed buying California and Illinois munis

As I wrote in the Hussman-inspired post recently, normal quantitative easing is an asset swap of freshly minted non-interest bearing assets (money) for interest-bearing assets (bonds). As such, it can really only help the economy via a reduction in interest rates since reserves do not create loan demand. And QE drains interest income from the economy to boot. In short, QE is not going to have an appreciable effect on the real economy unless you really jam it on: $8-10 trillion worth as Paul Krugman was saying – or more.

Atlanta Fed President Dennis Lockhart says the US will get $1.2 trillion over the next year . Again, I have to reiterate that I don’t favour QE because some might take this paragraph as an endorsement. The point is that fiscal is better than monetary at reflating the economy – especially at the zero bound. Monetary works via interest rates and asset prices while fiscal affects the real economy. And, sorry $1.2 trillion of monetary easing ain’t gonna get it done in a $14-$15 trillion economy.

As David Rosenberg puts it:

The U.S. economy is caught in a classic liquidity trap. With additional fiscal stimulus no longer a viable political option, even though the government is better equipped to deal with many of the structural hurdles to growth than monetary policy, Mr. Bernanke clearly feels that the Fed is the only game in town.

Enter David Blanchflower. He is a former MPC member at the Bank of England but also an American-British dual citizen professor who is very plugged in at the Fed. Here’s what he writes at Bloomberg  (emphasis added):

qqqI was at the Fed last week in Washington for one of its occasional meetings with academics…

The Fed is especially concerned about unemployment and the weak housing market. Chairman Ben Bernanke  made that clear in his speech last week. It would be a major surprise if the Fed didn’t do more quantitative easing — creating money by enlarging the central bank’s balance sheet with the purchase of securities — at its next meeting. Failing to act now with such high expectations may throw the markets into a tailspin.

Out of Question

The economic models are telling us that we need more stimulus. Lowering interest rates and more fiscal stimulus are out of the question. Quantitative easing remains the only economic show in town given that Congress and President Barack Obama  have been cowed into inaction.

The major questions about quantitative easing aren’t so much if, but how much will the Fed buy and of what type? There is little point in moving slowly. So $100 billion a month for six months seems a reasonable amount.

What will they buy? They are limited to only federally insured paper, which includes Treasuries and mortgage-backed securities insured by Fannie Mae and Freddie Mac. But they are also allowed to buy short-term municipal bonds, and given the difficulties faced by state and local governments, this may well be the route they choose, at least for some of the quantitative easing. Even if the Fed wanted to, it couldn’t buy other securities, such as corporate bonds, as it would require Congress’s approval, which won’t happen anytime soon.
eqq

Did you catch that. The Fed can legally buy as many municipal bonds as it wants without congressional approval. Talk about burying a lead. This is a big story. Blanchflower is essentially saying that the U.S. government can bail out both the housing market via Fannie and Freddie paper purchases and the state governments via Muni purchases. And, of course, the banks get to dump these assets onto the Fed who will hold them to maturity. I guarantee you this will have a very nice kick since it is the states where the biggest employment cuts are.

(3) Quantitative Easing Is Only Show in Town: David G. Blanchflower

http://www.bloomberg.com/news/2010-10-18/quantitative-easing-is-only-show-in-town-commentary-by-david-blanchflower.html

By David G. Blanchflower - Mon Oct 18 23:00:00 GMT 2010

Bloomberg Opinion

Oct. 13 (Bloomberg) -- Central bankers would like to be able to get back to business as usual where they change the price of money rather than its quantity. That day seems a long way off on both sides of the Atlantic.

The data this month that changed everything came from the U.S. labor market. September non-farm payrolls fell by 95,000; the creation of 64,000 jobs in the private sector wasn’t enough to compensate for the decline of 159,000 in the public sector. The minutes of the last Federal Reserve meeting, published last week, added fuel to the flames with calls for more action.

The markets have taken all of this as evidence that the Fed will start doing more quantitative easing at its meeting on Nov. 2-3. Stock markets surged and the dollar fell on the news.

I was at the Fed last week in Washington for one of its occasional meetings with academics. Half a dozen labor economists, including myself, met with Fed Board members to discuss the labor market. Of particular importance was a paper by John Haltiwanger, a professor of economics at the University of Maryland, who showed there has been a big decline in the job-creation rate over the past decade. The current obstacle is the lack of credit for small firms.

The Fed is especially concerned about unemployment and the weak housing market. Chairman Ben Bernanke made that clear in his speech last week. It would be a major surprise if the Fed didn’t do more quantitative easing -- creating money by enlarging the central bank’s balance sheet with the purchase of securities -- at its next meeting. Failing to act now with such high expectations may throw the markets into a tailspin.

Out of Question

The economic models are telling us that we need more stimulus. Lowering interest rates and more fiscal stimulus are out of the question. Quantitative easing remains the only economic show in town given that Congress and President Barack Obama have been cowed into inaction.

The major questions about quantitative easing aren’t so much if, but how much will the Fed buy and of what type? There is little point in moving slowly. So $100 billion a month for six months seems a reasonable amount.

What will they buy? They are limited to only federally insured paper, which includes Treasuries and mortgage-backed securities insured by Fannie Mae and Freddie Mac. But they are also allowed to buy short-term municipal bonds, and given the difficulties faced by state and local governments, this may well be the route they choose, at least for some of the quantitative easing. Even if the Fed wanted to, it couldn’t buy other securities, such as corporate bonds, as it would require Congress’s approval, which won’t happen anytime soon.

U.K. Easing

The Bank of England also seems likely to do more quantitative easing at its next meeting, when it will also publish its latest outlook. Its economic-growth forecast will surely be lowered as business and consumer confidence has slowed in the U.K. over the last few months. Unemployment has started rising and house prices have begun to fall - with the Halifax index dropping 3.6 percent in September.

The probability of the Monetary Policy Committee moving on Nov. 4 will increase if the Fed acts first: These aren’t currency wars but quantitative-easing wars, preventing the U.S. from gaining a competitive advantage and damping further appreciation of the pound against the dollar.

In an important speech, MPC member Adam Posen set out the case for more easing. Others, including Paul Tucker, Martin Weale and Paul Fisher, have made comments that seem sympathetic to restarting the asset-purchase program.

Who’s in Charge?

The new government under Prime Minister David Cameron has made it clear it wants to coordinate monetary and fiscal policy. So Chancellor George Osborne’s intervention at the International Monetary Fund meetings, saying he wanted more monetary easing, came as no surprise before he announces a program of massive fiscal tightening. This raises the question of who is setting central-bank policy. Will Osborne decide the scale, timing and type of assets to be bought? If so, we don’t need an MPC.

In any case, Osborne does have the power to change any decision he doesn’t like if he considers it in the national interest under the Bank of England Act - such as raising interest rates. So the MPC is now under the chancellor’s thumb, which may be a resigning matter for some. I certainly would not have taken to being told what to do.

When I was a member of the MPC, we first asked the Treasury for permission to do so as we needed to insulate the Bank’s balance sheet. Chancellor Alistair Darling then wrote back and agreed to QE up to a fixed amount, leaving the details of the speed, scale and type of purchases up to the MPC. We asked him rather than the reverse.

Central bankers yearn for the days when they used to meet to decide on the price of money by setting interest rates. It is hard to see when those times will return.

(David G. Blanchflower, a former member of the Bank of England’s Monetary Policy Committee, is professor of economics at Dartmouth College and the University of Stirling. The opinions expressed are his own.)

To contact the writer of this column: David Blanchflower at david.g.blanchflower@dartmouth.edu

To contact the editor responsible for this column: James Greiff at jgreiff@bloomberg.net

This is the Fed doing fiscal, friends. And I think it’s going to happen. Meredith Whitney take note.

(4) Ben Bernanke needs fresh monetary blitz as US recovery falters

Federal Reserve chairman Ben Bernanke is waging an epochal battle behind the scenes for control of US monetary policy, struggling to overcome resistance from regional Fed hawks for further possible stimulus to prevent a deflationary spiral.

By Ambrose Evans-Pritchard, International Business Editor  9:44PM BST 24 Jun 2010

http://www.telegraph.co.uk/finance/economics/7852945/Ben-Bernanke-needs-fresh-monetary-blitz-as-US-recovery-falters.html

Fed watchers say Mr Bernanke and his close allies at the Board in Washington are worried by signs that the US recovery is running out of steam. The ECRI leading indicator published by the Economic Cycle Research Institute has collapsed to a 45-week low of -5.7 in the most precipitous slide for half a century. Such a reading typically portends contraction within three months or so.

Key members of the five-man Board are quietly mulling a fresh burst of asset purchases, if necessary by pushing the Fed's balance sheet from $2.4 trillion (£1.6 trillion) to uncharted levels of $5 trillion. But they are certain to face intense scepticism from regional hardliners. The dispute has echoes of the early 1930s when the Chicago Fed stymied rescue efforts.

"We're heading towards a double-dip recession," said Chris Whalen, a former Fed official and now head of Institutional Risk Analystics. "The party is over from fiscal support. These hard-money men are fighting the last war: they don't recognise that money velocity has slowed and we are going into deflation. The only default option left is to crank up the printing presses again."

Mr Bernanke is so worried about the chemistry of the Fed's voting body – the Federal Open Market Committee (FOMC) – that he has persuaded vice-chairman Don Kohn to delay retirement until Janet Yellen has been confirmed by the Senate to take over his post. Mr Kohn has been a key architect of the Fed's emergency policies. He was due to step down this week after 40 years at the institution, depriving Mr Bernanke of a formidable ally in policy circles.

The Fed's statement this week shows growing doubts about the health of the recovery. Growth is no longer "strengthening": it is "proceeding". Financial conditions are now "less supportive" due to Europe's debt crisis.

The subtle tweaks in language have been enough to set bond markets alight. The yield on 10-year Treasuries has fallen to 3.08pc, the lowest since the gloom of April 2009. Futures contracts have ruled out tightening until well into next year.

Yet the statement may understate the level of angst at the Board. New home sales crashed 33pc in May to an all-time low of 300,000 after the homebuyer tax-credit expired, confirming fears that the housing market has been propped up by subsidies. Unemployment is stuck at 9.7pc. Manufacturing capacity use is at 71.9pc. The Fed's "trimmed mean" index of core inflation is 0.6pc on a six-month basis, a record low.

"The US recovery is in imminent danger of stalling," said Stephen Lewis, from Monument Securities. "Growth could be negative again as soon as the fourth quarter. There is no easy way out since fiscal stimulus has already been pushed as far as it can credibly go without endangering US credit-worthiness."

Rob Carnell, global strategist at ING, said the Obama fiscal boost peaked in the first few months of this year. It will swing from a net stimulus of 2pc of GDP in 2010 to a net withdrawal of 2pc in 2011. "This is very substantial fiscal drag. On top of this the US Treasury is talking of a 'Just War' against the banks, which will further crimp lending. It is absolutely the wrong moment to do this."

Kansas Fed chief Thomas Hoenig dissented from Fed calls for ultra-low rates to stay for an "extended period", arguing that loose money risks asset bubbles and fresh imbalances. He recently called for interest rates to be raised to 1pc by the autumn.

While he has been the loudest critic, he is not alone. Philadelphia chief Charles Plosser says the Fed has blurred the lines of monetary and fiscal policy by purchasing bonds, acting as a Treasury without a legal mandate. Together with Richmond chief Jeffrey Lacker they represent a powerful block of opinion in the media and Congress.

Mr Bernanke has fought off calls from FOMC hawks for moves to drain stimulus by selling some of the Fed's $1.75 trillion of Treasuries, mortgage securities and agency bonds bought during the crisis. But there is little chance that he can secure their backing for further purchases at this point. "He just has to wait until everybody can see the economy is nearing the abyss," said one Fed watcher.

Gabriel Stein, from Lombard Street Research, said the US is still stuck in a quagmire because Mr Bernanke has mismanaged the quantitative easing policy, purchasing the bonds from banks rather than from the non-bank private sector.

"This does nothing to expand the broad money supply. The trouble is that the Fed does not understand broad money and ascribes no importance to it," he said. The result is a collapse of M3, which has contracted at an annual rate of 7.6pc over the last three months.

Mr Bernanke focuses instead on loan growth but this has failed to gain full traction in a cultural climate of debt repayment. The Fed is pushing on the proverbial string. The jury is out on whether or not his untested doctrine of "creditism" will work.

"We are now walking on deflationary quicksand," said Albert Edwards from Societe Generale.

(5) IMF fears "an explosion of social unrest" from unemployment

IMF fears 'social explosion' from world jobs crisis

America and Europe face the worst jobs crisis since the 1930s and risk "an explosion of social unrest" unless they tread carefully, the International Monetary Fund has warned.

By Ambrose Evans-Pritchard

Published: 11:00PM BST 13 Sep 2010

http://www.telegraph.co.uk/finance/financetopics/financialcrisis/8000561/IMF-fears-social-explosion-from-world-jobs-crisis.html

"The labour market is in dire straits. The Great Recession has left behind a waste land of unemployment," said Dominique Strauss-Kahn, the IMF's chief, at an Oslo jobs summit with the International Labour Federation (ILO).

He said a double-dip recession remains unlikely but stressed that the world has not yet escaped a deeper social crisis. He called it a grave error to think the West was safe again after teetering so close to the abyss last year. "We are not safe," he said.

A joint IMF-ILO report said 30m jobs had been lost since the crisis, three quarters in richer economies. Global unemployment has reached 210m. "The Great Recession has left gaping wounds. High and long-lasting unemployment represents a risk to the stability of existing democracies," it said.

The study cited evidence that victims of recession in their early twenties suffer lifetime damage and lose faith in public institutions. A new twist is an apparent decline in the "employment intensity of growth" as rebounding output requires fewer extra workers. As such, it may be hard to re-absorb those laid off even if recovery gathers pace. The world must create 45m jobs a year for the next decade just to tread water.

Olivier Blanchard, the IMF's chief economist, said the percentage of workers laid off for long stints has been rising with each downturn for decades but the figures have surged this time.

"Long-term unemployment is alarmingly high: in the US, half the unemployed have been out of work for over six months, something we have not seen since the Great Depression," he said.

Spain has seen the biggest shock, with unemployment near 20pc. Britain's rate has risen from 5.3pc to 7.8pc over the last two years, a slightly better record than the OECD average. This contrasts with the 1970s and early 1980s when Britain was notoriously worse. UK jobless today totals 2.48m.

Mr Blanchard called for extra monetary stimulus as the first line of defence if "downside risks to growth materialise", but said authorities should not rule out another fiscal boost, despite debt worries. "If fiscal stimulus helps avoid structural unemployment, it may actually pay for itself," he said.

"Most advanced countries should not tighten fiscal policies before 2011: tightening sooner could undermine recovery," said the report, rebuking Britain's Coalition, Germany's austerity hawks, and US Republicans. Under French socialist Strauss-Kahn, the IMF has assumed a Keynesian flavour.

The report skirts the contentious issue of whether globalisation lets companies engage in "labour arbitrage", locating plant in low-wage economies such as China to ship products back to the West. Nor does it grapple with the trade distortions caused by China's currency policy, except to call on "surplus countries" to play their part in rebalancing.

The IMF said there may be a link between rising inequality within Western economies and deflating demand.

Historians say the last time that the wealth gap reached such skewed extremes was in 1928-1929. Some argue that wealth concentration may cause investment to outstrip demand, leading to over-capacity. This can trap the world in a slump.

How about some comment on these issues.??