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Roubini On U Shaped Recovery: More Statesmanlike or Less Certain?

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Nouriel Roubini verged on apocalyptic during the course of the crisis, and was proven largely right. Now that he has softened his stance, some have accused him of moderating his tone as a result of his much higher profile.

While that’s possible, a couple of factors seem more likely. First and foremost, much of Roubini is now being filtered through the MSM, which as many readers have commented, has been too often trying to find the happy face in any bit of economic news. A glaring instance in July was when Roubini put out a press release disputing a Bloomberg news report claiming Dr. Doom had said the recession would be over this year. So we are not getting the raw, unedited, long form Roubini of RGE Monitor, which tends to pointed language, but the MSM soundbite. Some of the forcefulness of Roubini’s views comes from his relentless and usually multi-point exposition, and not just colorful turn of phrase.

Second is we are well outside charted bounds, and making any kind of forecast is perilous. As much as I think that the elephant in the room no one wants to talk about is the need to restructure and write down debt, the powers that be are acting as if their efforts to halt the asset price collapse via massive liquidity injections is a solution. It isn’t. It was an effective stop-gap, but no one seems to have an end game. Worse, to the extend the authorities are thinking about next steps, the focus is on when and how to mop up liquidity, when the bigger issue is how to reform the financial system, how to curtail subsidized risk-taking (now that we seem to be giving virtually every form of credit known to man some sort of backstop), and how to renegotiate and restructure bad debts. There are too many contradictions in the current policy mix for this to be healthy in the long run (and it ignores the lessons of past financial crises, which show that tacking the banking system mess and cleaning up the bad debts are top priorities). But we could bump along for quite a while before other shoes start to drop.

Paul Krugman has had a couple of posts on the fact that the normal words like “recovery” don’t adequately characterize our “getting less bad” situation. We may escape a parallel fate, but the US in the early 1930s and Japan in 1992 both featured a roughly year long period of stabilization that were widely seen as the precursor to recovery before the economy took another leg down.

Parsing Roubini’s latest piece at the Financial Times (with his characteristic list), his bottom line is we seem to be on track to an anemic recovery, but also says another drop could be in the works.

From the Financial Times:

There are several arguments for a weak U-shaped recovery . Employment is still falling sharply in the US and elsewhere – in advanced economies, unemployment will be above 10 per cent by 2010…

Second, this is a crisis of solvency, not just liquidity, but true deleveraging has not begun yet …

Third, in countries running current account deficits, consumers need to cut spending and save much more, yet debt-burdened consumers face a wealth shock from falling home prices and stock markets and shrinking incomes and employment.

Fourth, the financial system – despite the policy support – is still severely damaged…

Fifth, weak profitability – owing to high debts and default risks, low growth and persistent deflationary pressures on corporate margins – will constrain companies’ willingness to produce, hire workers and invest.

Sixth, the releveraging of the public sector through its build-up of large fiscal deficits risks crowding out a recovery in private sector spending. The effects of the policy stimulus, moreover, will fizzle out by early next year…

Seventh, the reduction of global imbalances implies that the current account deficits of profligate economies, such as the US, will narrow the surpluses of countries that over-save (China and other emerging markets, Germany and Japan). But if domestic demand does not grow fast enough in surplus countries, this will lead to a weaker recovery in global growth.

Yves here. Roubiini was early on to the U shaped recovery, but he is not calling for a Japan rerun (the L shape, for alphabet fans). But this is his second possibility:

…..there is a rising risk of a double-dip W-shaped recession. For a start, there are risks associated with exit strategies from the massive monetary and fiscal easing…

Another reason to fear a double-dip recession is that oil, energy and food prices are now rising faster than economic fundamentals warrant, and could be driven higher by excessive liquidity chasing assets and by speculative demand. Last year, oil at $145 a barrel was a tipping point for the global economy, as it created negative terms of trade and a disposable income shock for oil importing economies. The global economy could not withstand another contractionary shock if similar speculation drives oil rapidly towards $100 a barrel.

The second possibility is not getting the play it deserves. Some economists, in particular Jim Hamilton, think the commodities run-up of last year played a direct role in the crisis, by pushing consumers at the margin of begin able to service debt over the edge.

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10 comments

  1. Hugh

    Is there really much new in this piece by Roubini? Many of us have been making these points for some time. The fundamentals remain unaddressed. Consumers. are. not. coming. back. (Indeed you have another post up on this very subject.) It isn't just that the financial system is damaged. It needs to be reformed and restructured. This too is not in the cards. And of course since consumers aren't going to be spending economic activity in the rest of the world is going to be affected negatively.

    "the releveraging of the public sector through its build-up of large fiscal deficits risks crowding out a recovery in private sector spending"

    To be honest, I have never understood this. Where is this private sector spending going to come from? Companies? Consumers? Mice? I'm just not seeing it. The government remains the only real spender available, and so far it is doing a really lousy job of it. But I don't see any near term demand for credit it will be displacing. And as the government is backstopping everyone else what would keep it from backstopping private credit for a while if the private sector showed signs of spending more?

    I don't see oil going to $100 largely because it moves with the stock market. They are tandem bubbles. The stock market would tank well before $100 and take oil with it. Parenthetically, why are none of our leaders doing anything about the current speculative bulge in oil? Yeah, capture, I know.

    Rather than the silly letter models, as I have said before, we should be looking at 3 periods: now to the end of the year, 2010, and 2011 and beyond. I could be wrong but I don't see how the bubble in the stock market can be sustained through the winter. I would call this the Stock Market phase. 2010 is the Election Year. More of the original stimulus will be coming in. But if the stock market is down and the fundamentals are worse (and they will be), then Obama and the Congress will have a strong incentive not to change course but to increase spending (in short term not very effective ways) to help Democrats in the election. Republicans will oppose it for the same reason. 2011 for me looks like the Wall. I see the most likely outcome for it to be depression. Best case would be Japanification but I don’t think the fundamentals will allow us to tread water indefinitely, especially since that is what we are doing now.

  2. francois-guillaume

    nobody talks about the I shaped scenario… that is a continuous and never (for the foreseeable future) ending drop to GDP…

  3. patrick neid

    It's called the soothsayer scramble.

    Missing monster rallies against predicted Armageddons can be career threatening. In Chicago/New York it usually ends up in driving cabs!

  4. DownSouth

    patrick neid,

    Your comment cuts to the heart of the great chasm that divides America.

    A Wall Streeter looks at the events of the past two years and believes Armageddon has been avoided.

    The rank and file American looks at the events of the past two years and believes they are living in Armageddon.

    As the NY Times reported this morning, 401(k) "account balances are roughly 25 percent lower than before the crash."

    http://www.nytimes.com/2009/08/24/opinion/24mon1.html?ref=opinion

    But something far more onerous has occurred, which the NY Times doesn't even mention. For those in or approaching retirement can no longer move their balances to safe investments that pay a decent return. My 93-year-old mother, who partially depends on interest from her savings to live, has seen her income from her balances drop by almost 75% over the past couple of years, even though those balances have remained the same.

    Twenty years ago Gordon Gekko drew a bold line between engaging in productive endeavors and playing zero sums games. Today's Wall Streeters don't even acknowledge the difference.

  5. "DoctoRx"

    "Growth" is not everything, though the MSM including Dr. Roubini speak of it as if it were the Holy Grail.

    Surely such a rich country as the U.S. can afford a few years of no growth while it gets its financial sector and the rest of the economy in better balance. A strong social safety net is needed, but not a safety net for the financial gamblers.

  6. Fred

    screw the social safety net. Its just an excuse to eat away at our freedoms.

    You liberals should just quit being sissies and accept reality.

  7. Fernando08

    The Soviet union unraveled when Gorbachev, realizing the economic truth for the first time, laid off 500,000 of the Red Army. It had no capacity to pay them, feed them, house them etc. It was a unilateral decision seeking no quid pro quo from the Western Bloc. Our Wall Street has finally collapsed but our current military budget, for this year alone, is $687B. That is almost as much as the much maligned, too much to spend too fast, and more than we can read and vote on in so short a time stimulus package. These huge amounts are passed annually with no review, tea party protests, or town hall gun rallies. Gee, I wonder why? We can not support our conspicuous consumption of military power, which is well prepared to face down the Warsaw pact in the biggest tank battle ever or darken the skies of Moscow with thousands of jet fighters superior to the MIG air wings of 1985. I do not think it is too much to ask to declare victory in Europe, abandon the defense of the ski slopes of the Alps and let our service men and women spend their pay checks in the lower forty eight states. The military bubble grows unabated, sacrosanct and unlike health reform or financial manipulation of zero sum games causes a structural deficit and misallocation of resources on a magnitude greater than the most recent housing bubble. Which brings me to questions about recovery real or imagined. If bringing into the fold 47 million uninsured will be a huge windfall for the entire medical sector and most of its suppliers, what would happen if the comparable group of structurally unemployed and underemployed were brought into the economy by continued stimulus programs over the next 7 years? It would be similar to bringing on board 2 new states the with combined populations of Pennsylvania and California. Demand needs to be generated from somewhere and with the scale of America, at 300,000,000 we need to keep bringing people into the middle class by virtue of income and consumption or face periodic social upheavals when financial problems like the current one come up. It can take decades to overcome the devastation of the economic collapse of older urban areas. I do not anticipate great reform now from Washington directed at Wall Street and banking in general. I thinks the Democratic base is going to be taken care of with health care reform, in order to garner an untouchable and insurmountable political base from which to assault entrenched special interests of an organized oligarchy. While I respect your financial analysis, I do not see any firm understanding that the social order as a whole is the platform for the economy and financial organizations. The political economy of the nation-state can not be allowed to unraveled due to shareholder rights. Their rights will be gone with the wind without the nation-state and the social order it provides to protect and uphold them.

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