Roubini’s Latest “Why Things Are Hopeless” List Hits New Record, 20 Items!

I have not made a formal tally of Roubini’s various lists of why the economy is going (and will continue to go) to hell in a handbasket, but recent sightings suggest his typical list is eight to twelve reasons.

However, in his latest missive, on the subject of why the consumer is toast, Roubini outdoes himself and comes up with twenty reasons. Oh, sorry, AT LEAST twenty reasons. I also don’t think I’ve ever read Roubini say his tally of woes was less than comprehensive.

In case you are new to this line of discussion, “falling consumption” in the absence of big time government countermeasures, equals “memorably bad downturn.”

Is there some secret significance to this development? Numerologists and technical analysts are encouraged to weigh in. Personally, I think his list does boil down to a dozen or so reasons, but be sure to read down to his last point, where he draws his bottom line, a peak to trough fall in GDP of 10%. He needed 20 reasons to steel readers for his conclusion.

And I am really not making fun of Roubini. It is merely that because his messages are so consistently grim and have so far proven correct, one needs to find comic relief where one can.

From RGE Monitor:

One can count at least 20 separate or complementary causes that will sharply reduce consumption in the next several years:

· The US consumer is shopped-out having spent for the last few years well above its means.

· The US consumer is saving-less as the already low household savings rate at the beginning of this decade went to zero/negative by 2006 and has now to raise to more sustainable levels.

Yves here. I hate to be a pedant, but one and two are more or less the same reason.

· The US consumer is debt burdened with the debt to disposable income having increased from 70% in the early 1990s to 100% in 2000 and to 140% in 2008.

· Not only debt ratios are high and rising but debt servicing ratios are also high and rising having gone from 11% in 2000 to almost 15% now as the interest rate on mortgages and consumer debt is resetting at higher levels.

· The value of housing wealth is now sharply falling by over $6 trillion as home price depreciation will soon be 30% and reach a cumulative fall of over 40% by 2010. Recent estimates of this wealth effect suggest that the effect may be closer to 12-14% rather than the historical 5-7%….

· Mortgage equity withdrawal (MEW) is collapsing from $700 billion annualized in 2005 to less than $20 in Q2 of this year. Thus, with falling housing wealth and collapsing MEH US households cannot use their homes anymore as ATM machines borrowing against them.

· The value of the equity wealth of US households has fallen by almost 50%, another ugly wealth effect on consumption.

· The credit crunch is becoming more severe as the recent Q2 flow of funds data and the Fed Loan Officers’ Survey suggests: it is spreading from sub-prime to near prime to prime mortgages and home equity loans; and from mortgages to credit cards, auto loans and student loans. Both the price and the quantity of credit are sharply tightening.

· Consumer confidence is down to levels not seen since the 1973-75 and 1980-82 recessions.

· Real wage growth and real income growth has been stagnant in the last few years as income and wealth inequality has been rising. And now with GDP and real incomes falling real consumption will fall sharply.

· The Fed is reaching the zero-bound on interest rates as the economy gets close to deflation given the slack in goods, labor and commodity markets. Deflation means that consumers will postpone consumption as future prices are lower than current prices, as real rates are positive and rising and as debt deflation increases the real value of the households nominal debts

· Employment has been falling for 10 months in a row and the rate of job losses is now accelerating… In this cycle job losses have been so far “only” slightly over 1 million while labor market conditions are severely worsening based on all forward looking indicators…Massive job losses and concerns about job losses will further dampen current and expected income and further contract consumption.

· Tax rebates of over $100 billion failed to stimulate real consumption earlier in 2008. Only 25% of the tax rebate was spent as US consumers are worried about jobs and need to use funds to pay their credit card and mortgage….another general tax rebate would be as ineffective as the first one in boosting consumption.

· The 1990-91 and 2001 recessions were not global; this time around the IMF is forecasting a global recession for 2009.

· The recent rise in inflation – that is only now slowing down – reduced real incomes even further for lower income households who spend more than the average households on gas, transportation, energy and food. The recent sharp fall in gasoline and energy prices will increase real incomes by a modest amount (about $150 billion) but the losses of real disposable income and thus falling consumption from other sources (wealth, income, debt servicing ratios) are much larger and more significant.

· The trade weighted fall in the value of the U.S. dollar since 2002 has worsened the terms of trade of the US and reduced further real disposable income and the purchasing power of US consumers over foreign goods.

· With consumption being over 71% of GDP a sharp and persistent contraction of consumption all the way through at least Q4 of 2009 implies a more severe recession than otherwise. Consumption did not fall even a single quarter in the 2001 recession and one has to go back to 1990-91 to see a single quarter of negative consumption growth…

· Monetary easing will not stimulate durable consumption and demand for residential housing as demand for such capital goods becomes interest rate insensitive when there is a glut of capital goods; monetary policy becomes like pushing on a string. In the previous recession the Fed cut the Fed Funds rate from 6.5% to 1% and long rates fell by 200bps. In spite of that capex spending of the corporate sector fell by 4% of GDP between 2000 and 2004 as there was a glut of tech capital goods and it took years to work out such a glut. Today there is a glut of housing, consumer durables and autos/motor vehicles; so it will take years to work out this glut…

· While policy rates are sharply falling the nominal and real rates faced by households are rising rather than falling…. together with less availability of credit are severely dampening the ability of households to borrow and spend.

· To bring back the household savings rate to the level of a decade ago (about 6% of GDP) consumption will have to fall – relative to current GDP levels – by almost a trillion dollar. If all of this adjustment were to occur in 12 months GDP would contract directly by 7% and indirectly (including the further collapse of residential and corporate capex spending in a severe recession) by 10%, an exemplification of the Keynesian “paradox of thrift”. If such an adjustment were to occur over 24 months rather than 12 months you would still have negative GDP growth of 5% for two years in a row with a cumulative fall in GDP from its peak of 10% (note that in the worst US recession since WWII such cumulative fall in GDP was only 3.7% in 1957-58). One can thus only hope that this adjustment of consumption and savings rates occurs only slowly over time – four years rather than two. Even in that scenario the cumulative fall of GDP could be of the order of 4-5%, i.e. the worst US recession since WWII. Note that the cumulative fall in GDP in the 2001 recession was only 0.4% and in the 1990-9 recession was only 1.3%. So, the current recession may end up being three times as long and at least three times as deep (in terms of output contraction) than the last two and worse than any other post WWII recession.


Originally published at Naked Capitalism and reproduced here with the auhtor’s permission.

13 Responses to "Roubini’s Latest “Why Things Are Hopeless” List Hits New Record, 20 Items!"

  1. Anonymous   November 16, 2008 at 6:18 am

    Cheery stuff.Where’s the silver lining?

  2. Guest   November 16, 2008 at 6:45 am

    It’s not silver, it’s in gold

    • Anonymous   November 18, 2008 at 1:16 am

      Silver will do better than gold…

  3. give me a lever   November 16, 2008 at 11:33 am

    As a side question, I’m aware of the statistics regarding credit card debt, homeowners underwater, student loan deliquencies etc.. Has anyone bothered to figure out how much time it would take given employment and median income to pay off the total sum of debt?Additionally will there be problems going forward, like lower wages for employment? slower employment? will current employees face renegotiations? I was speaking with a Detroit manager that told me they were laying off full timers and hiring them back as full time freelancers to avoid benefits. Keynsian methods require significant amounts of time to organize and implement but that seems to be taking a backseat right now.

  4. Alan Harvey   November 16, 2008 at 12:11 pm

    Adding another implicit in Roubini’s analysis and from his testimony before the Joint Economic Committee a couple of weeks ago, big new fiscal stimulus is essential immediately (which seems less and less likely to occur).Absent this stimulus to arrest the collapse of demand, investment and prices, several more pounds of flesh and muscle and bone will be extracted from the economy before January 20.

    • devils advocate   November 16, 2008 at 5:15 pm

      Alansolid point———————Aland/Yves”consumer confidence” is way downis this statistic refined in ways to discuss potential effects of events or lack of?

  5. Guest   November 16, 2008 at 7:47 pm

    Yves get a reality check…. Don’t doubt Roubini correctness….. I think the US economy is in a much worse shape than one can imagine.GOD BLESS NOURIEL ROUBINI for his insight….

  6. Anonymous   November 17, 2008 at 9:27 am

    The states should just simply assume absolute authority and reduce the populations to the level of a rescource. Judgements can be rendered in total disregard of any hard facts and the people slammed at the slightest thought of any protest. Just throw them out on the streets and into the labor camp where they can simply just rot away into nothingness….don’t laugh, this is a daily occurence in states like NC and SC…and people call it freedom!!!

  7. R.H. Teruya   November 18, 2008 at 3:09 pm

    What would happen if the population of America were increased via immigration by 5%?That’s 15 million more American families. Foreign graduates can do this at no cost.Is this bullish for housing? Bullish for cars?Immigration can solve this financial crisis.

    • Guest   November 23, 2008 at 9:53 am

      immigration can not solve this as there will not be jobs for legal or illegal aliens. the gov’t should cancel H1B visa program and limit immigration as we allow over 1 million a year now to come legally. step up deportations too!

  8. Guest   November 23, 2008 at 9:59 am

    jobs need to go to Americans as there wont be enough to go around…cancel H1B visa programs and send foreigners working under H1B home so the job will be available to an american. This will become a huge issue as unemployment hits 9%-10%. It is high time the government does what is right to the american people and not those wishing to come live in the USA. THEY ARE NOT AMERICANS!! Yes, we have been generous when time were good and allowed over a million a year to become citizens, but this will need to be restricted and sharply reduced. send all illegals packing like we did in the 50’s with operation wetback….we did it before look it up! and, we did it because of a lack of jobs for AMERICANS!!

  9. Anonymous   November 23, 2008 at 7:51 pm

    If there were americans who could do the jobs, the visas would not have been issued. Send away skilled foreigners if you like but there will not be enough skilled americans to fill the jobs. Then what?

  10. Anonymous   December 10, 2008 at 6:19 pm

    There are American’s who can do the jobs. American companies don’t want to pay them a market salary. Indian companies in the U.S. are the biggest users of H1B visas and they use it to hire Indian Citizens at a lower salary. They are abusing the system. There are lots of qualified tech professionals who can’t find a job because of H1B visas. Wake up! Executives just want to keep the money for themselves.