An inadvertent slip by a middle-ranking member of the new Obama administration may throw the US economy into a tailspin.

In what was thought to be an attempt to distance the new State Department from the foreign policy objectives of the preceding Bush administration, an Under Secretary of State for International Treaties and Agreements told his Senate confirmation hearing that the US would henceforth abide by all international conventions and obligations.

Gone were the days when the US was the odd man out when it came to the Convention on the Rights of the Child, to the Ottawa Mine Ban Treaty, to the International Criminal Court, to the Convention on Cluster Munitions, to the Chemical Weapons Convention, and all those other international agreements that promote justice, peace and a respect for rights.

The Bushites saw these as threats to US interests, insidious conspiracies to sap the will of the US and reduce its dominance in world affairs.  But in an era of hope, all this was to change, so the prospective Under Secretary told the Senate Foreign Relations Committee.

In language that was more exuberant than is normally heard from a career diplomat, he announced that the US would voluntarily abide by all its international obligations, ‘without caveats, reservations or exclusions’.

Unfortunately, this statement was spotted by the Legal Affairs Division of the International Monetary Fund, who quickly descended on the US Treasury Department with a series of prescriptions for the ailing US economy.

Most analysts have assumed that IMF intervention in a country’s economy was always at the request of the country concerned.  Depleted reserves, hopeless balance of payments problems and chronic budget deficits would leave countries no option but to turn to the ‘lender of last resort’ for the necessary cash to keep the ship of state afloat.

Of course this help did not come without cost.  Any IMF assistance was tied to a set of economic conditions (which used to be called Structural Adjustment Programmes but have since been re-named as Poverty Reduction Strategies).  In effect, countries had to delegate decision-making over important areas of their own economy to IMF staff.  Otherwise, the funding tap would be turned off.

However, it seems that the charter of the IMF, which all signatory nations are legally required to observe, contains a special clause covering contingency measures in cases where one country’s economic mismanagement threatens the stability of another country or countries.  In such extreme circumstances, the IMF need not wait for an invitation to intervene, but can impose its own economic order on the recalcitrant state.

It is not clear whether the US administration was aware of this regulation.  It seems unlikely that they were not, since it is generally believed that the US Treasury Department had played the major role in drafting the IMF rule book.

Armed with this regulation, the IMF promptly served notice on the US government that it was preparing a set of economic measures designed to ‘correct the faults’ in the US economy, which were clearly having a destabilizing effect on the economies of many other IMF members, and indeed on the entire global economic and financial systems.

Before the US had time to recognize the severity of the threat, the list of ‘conditions’ arrived.  These should have come as no surprise, since it is widely assumed that over the years, IMF policies were drafted by the US Treasury Department.  Current economic advisors to the Obama administration Larry Summers and Robert Rubin are thought to have been the main architects of the IMF response to the Asian, Russian and Latin American economic crises. 

It is therefore a matter of some irony that the IMF has sought to prescribe for the US the same medicine it forced down the throats of other countries. 

The US government bail-outs for the banks, insurance companies, automobile manufacturers and other firms must end immediately.  Privatization is the correct economic strategy, rather than a creeping nationalization.  The fact that the bail-outs have been authorized by a democratically-elected government and seem to be supported by public opinion is irrelevant to the IMF.  Popular sentiment must not be allowed to get in the way of correct economic policies, says the IMF.  In fact, it says that the US government has the moral responsibility to explain to its own people why mass unemployment, widespread bankruptcies, severe cuts in government services and a savage contraction in the economy are in fact good for them.

The IMF notes that the US had in the past made good progress in this area, and singles out the privatization of mortgage guarantee giants Fannie Mae and Freddie Mac.  Although both companies carry much of the blame for the ‘toxic’ subprime loans that precipitated the crisis, the IMF feels that the market should be allowed to correct itself.  If this leaves the banking, insurance and major manufacturing sectors in ruins, as is likely to happen without government subsidies, then this will lay the foundation for much healthier economic structure in two or three generations’ time.

The US dollar must be devalued to make exports more competitive, even if this means wiping out the value of savings, and interest rates raised to make the economy attractive to private investors, even if this makes capital simply too expensive for most firms to carry on in business.. 

The US government must also take immediate measures to balance its budget.  Any ideas of healthcare reform that would increase government spending must be abandoned.  The US has led the rich country economies in leaving healthcare to the private sector, notes the IMF.  While the effects of this on standards of health (where US statistics on such things as infant mortality rival those in the 3^rd world) have generally been catastrophic, the economic benefits have been substantial, with drug companies normally offering investors the best rates of return on the stock market. 

Cuts must also be made in education services, infrastructure development such as roads, environmental protection and alternative energy development.  If the US decides that such services must be maintained for political reasons, then it must do so by user fees or corporate sponsorship, rather than from tax revenue.  This will also allow the government to lower tax rates, especially for private business.

Some commentators have pointed out that a balanced federal budget will necessarily result in massive layoffs of government officials at a time of rising unemployment.  The IMF is unapologetic about its advice in this area and notes that for years, economic migrants, legal and illegal, have been attracted to the US; it is perhaps time for US workers to seek employment in other countries.  Such international movements of labour, argues the IMF, will correct what it sees as excessively expensive labour costs in the US and make the international labour market far more efficient. 

However, the effects on executive pay are likely to be positive.  With fewer employees on the payroll, the IMF predicts that future profits will accumulate in the hands of the super-rich minority.

While it sets about reducing the world’s largest economy to rubble, the IMF sees no economic difficulties for itself.  Since the salaries of IMF staff have to remain competitive with the private sector, they’re laughing all the way to the bank.