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

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.


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