"Global macroeconomic performance continues to improve slightly overall, but medium-term prospects do not look favourable. The problem is not a lack of monetary cooperation. The problem is a continuing “fear of fiscal.” Despite a sharp drop in government borrowing in many countries as the recovery has gradually taken hold and “consolidation” has continued. Few, if any governments are willing to use the room to maneuver. Consequently, too much of the policy burden still falls on monetary policy.

These imbalances cause two problems. First, the effectiveness of monetary policy actions is constrained by the zero lower bound on interest rates. Quantitative easing and other unorthodox actions can mitigate the constraints to some extent, but the limited effectiveness is still evident. Second, the longer interest rates remain close to zero, the more incentives will be distorted (away from saving and with limited stimulus to investment).

In addition to this general problem, one must be concerned that the Euro area does not appear to be closer to a sustainable path than it was five years ago. Unemployment in the southern regions remains unsustainably high, and the contrast in the requirements for equilibrium between north and south becomes more of an obstacle the longer it persists. Also, in North America, no one is seriously addressing the sluggishness of the recovery. Even if the U.S. Administration were to put forth a credible plan, founded on a return to fiscal stimulus, the dysfunctional Congress would surely refuse to take it up.

These concerns make a deflation-driven financial crisis ever more likely. In such a scenario, the ongoing failure of the U.S. Congress to approve the 2010 IMF reform package--action that would help ensure that the IMF would have the resources and the credibility to manage the crisis—is especially worrisome."