@Ryan Darwish “I believe the current economic stimulus plan being proposed is…tragic. It perpetuates the idea that economic growth derived primarily from growing disposable consumption can be the basis of a healthy and sustainable economic system.  “The true values from which real wealth is created, which were esteemed ideals of founders of the United States, are thrift, hard work, and reinvestment into productive assets… If there is a long term fix it will not come in the form of tax cuts and rebates to stimulate spending. It will come from a public policy which focuses on rebuilding the productive and innovative capacities, and, consequently, the competitiveness of the nation…rebuilding infrastructure and a commitment to funding the development of more minds capable of ingenuity and innovation, namely cutting edge education.  “It also means a shift from a consumption based society driving economic growth to a saving and investment driven economic growth model. The alternative…is a selling off of the assets of the United States and becoming a people subservient to…other nations.” (27 at 13:13:32)   I realize this is an edited down version of what you said, Mr. Darwish, but I believe your message of such importance that it bears repeating and made available on Wikipedia. There is a dearth of America’s economic history on the internet, mixed into a montage of erroneous worldwide economic theory, with no recognition of the success of the American system. Thank you. 

Thank you Sondra, for your kind comments.  Ryan Darwish

 @William Pesek ‘At last year’s Davos confab, Roubini got some grief for his dire pronouncements about credit markets. “The system is becoming very complex,” he said. “The risk of some crisis happening is rising.” Was it ever.’   Roubini has an instinctive as well as expert economic sense. In that he serves no master save his own search for economic truth and analysis, it is not surprising that he would be among the first of the world’s pundits to sense stagdeflation.  Whether or not America stagdeflates is debatable until it actually happens. The point is to heed Roubini’s warning, i.e. take an umbrella if skies are predicting rain.  The world – even when it pounds Roubini – always takes him very seriously as an expert economist. And so it should. 

@Guest on 2008-01-27 18:42:25 Disasterous in what way? Dollar destruction? Or in terms of equity value erosion as the markets pop at open and wash out the shorts before the Players role in and short off a high around DJI 12,700?  A cut is already built in, but how much will be enough to prevent a total wash-out? 25? 50? Either way it is a ban-aid on a shotgun wound.

@Giraf:  I didn’t quite understand your post, since January 29 is tomorrow. Are you saying we are going to get no cut on Tuesday? I personally believe that is the right course for the Fed to follow; but I don’t think BB can get away with less then 25bp and will probably for for 50.

“No Fed change coming on Tuesday.”  As someone already said, a cut is already built in. And if the Fed is listening to NR at all, they will keep cutting.  A no-cut would send the markets into a tailspin, and instead of an orderly deflating of the bubble(s), we might get a crash. Besides, a no-cut now would confirm people’s suspicion that last week’s was a mistake. On the other hand, another 50bps on Wednesday would confirm that the Fed thinks we’re in real deep doodoo. But then it looks like we may really be in it up to our necks, so 50bps it will be — that’s my prediction.  –iww

Giraf,  cutting interest rates 7 days later does not make a lifetime fo difference..  also, I think the rate cut didnt help much.. it was the bailout of the credit insurers that help prop-up the market… (though we have so scientific basis to measure this)…   now that half-baked idea is falling apart, expect more carnage tomoro..   mrskeptical  

Mr. Skeptical.  I don’t disagree. I’ve had a sense since Friday that Monday is going to be really messy again. As I write, the Nikkei is down about 300 points.  Where are you located BTW?

Do you remember MK’s speech that followed BB’s rate cut?   http://www.bankofengland.co.uk/publications/speeches/2008/speech333.pdf  Some excerpts:  As I said two years ago, “risk premia have become unusually compressed and the  expansion of money and credit may have encouraged investors to take on more risk thanhitherto without demanding a higher return. It is questionable whether such behaviour can persist”. And, as we have seen, it hasn’t. The re-pricing of risk that is still continuing is not a process that we should try to reverse.  …  Since those actions, conditions in money markets have eased considerably. The  benchmark 3-month interbank lending rate has fallen by around 75 basis points relative to expected policy rates. But conditions are not yet back to normal and remain fragile.    Although central banks can and will respond to the consequences of strains in the banking system for their economies, the solution to the underlying problem does not rest with them but with the banks and financial markets themselves. Banks must reveal losses promptly, and, most importantly, raise new capital where necessary.    Tighter credit conditions mean that, as a nation, we are likely to save more of our income this year than in the recent past. In the short run, that will slow economic activity, possibly quite sharply. And there is a risk that weaker activity and lower asset prices could result in another round of losses for banks and a further tightening of credit conditions.  ..  The adjustment which not only the British but the world economy is experiencing is necessary as the imbalances, between spending and saving and between domestic demand and trade, unwind. As part of a longer-run rebalancing of the UK economy, an increase in our national saving rate, both private and public, is necessary. The low level of national saving is apparent from the current account deficit  …  Tighter credit conditions mean that, as a nation, we are likely to save more of our incomethis year than in the recent past. In the short run, that will slow economic activity, possibly quite sharply. And there is a risk that weaker activity and lower asset prices could result in another round of losses for banks and a further tightening of credit conditions.  …  Although we have little control over the strength of the economic winds buffeting our economy, our framework of inflation targeting does, as I said in my first speech as Governor almost five years ago, provide a seaworthy vessel. We cannot avoid some volatility in the short run and it is important that everyone understands the limits to the ability of central banks to smooth the economy. But, by keeping our eye firmly on the need to keep inflation close to target in the medium term, we can reach the calmer waters of low inflation, steady growth and a better balanced economy. And our policy framework will, I hope, allow you not to be overwhelmed by the headlines and to focus on what really matters for our future prosperity – the successful running of your own businesses.  It is clear that MK believes that monetary policy is not the recipe here. However, from his actions and research it is clear that Benny, and many economists including NR, disagree with him.  So assuming the Fed’s take on the situation is now closer to the Professor’s, we will get another cut, most likely 50 bpts this week.   IMO, our problems are structural in nature and won’t be solved by cutting rates. But perhaps our leaders and thinkers (including the Professor) have given up on trying to fix the system and all they are doing now is recommend cosmetic courses of action that buy some time such as driving the FF rate towards 0% and mailing people checks to buy China-made junk. To me this is all pretty sad.

@OR  Isn’t Mr. King being a bit “holier than thou”? The U.K is faced with many of the same problems that exist in the U.S. They have had an uncontrolled property bubble for years now. And he has been in the driver’s seat of U.K. monetary policy for a goodly amount of time.

Professor Roubini:  I have followed your work, on and off, since the Asian Financial Crisis when I served on a US industry trade committee responsible for coordinating marketing activities in the Korean market. My interest today is simply intellectual curiosity. Your work was illuminating 10 years ago and is better today; more comprehensive and with a global reach. This blog, and that of Mr. Setser, leads the world in wiki-economics and perhaps also in quality of open-source information sharing. The quality of the participation here is, I believe, without parallel. It’s a credit to you. I only wish I had something more substantial to offer myself.  I appreciate the free trial subscription. I know there is an associated cost that must be funded, but hope that revenues might be structured so as not to exclude all but institutional or professional interests. Further, I myself owe nothing to anybody. I am free to say what I feel and unafraid of the consequences. I am perfectly willing to register in order to read and participate with the others here. Some may not be in as fortunate a position. It doesn’t seem to me that the privilege of anonymity was being abused. And from a marketing point of view, when you lead the world you should be careful not to change too much. When it’s working, go with it. Real success like yours is not common and the reasons for it are just as complex, interwoven and poorly understood as the economic issues we discuss here. If that were not the case we could all replicate it. You might consider also that if you had a payroll equal to Societe General you might not secure better talent than that which you find here.  Signing with pseudonym as is the custom,  - jd –  

Yep. Asia Stocks climb most in a decade on Friday, then a few hours later the Dow sells off 170 Pts. The game continues. Can’t wait to see how Europe opens.

@Tulip South Seas on 2008-01-27 21:20:52  ”Zero and indeed negative human population growth seems to be your object. I disagree”  No, it’s not MY object, it’s pure reality. Again, all those things that you are advocating promote population growth. This is a finite planet, with finite resources. Growth, therefore, is finite! Regardless of whether you dislike the various mechanisms for population reduction, population reduction WILL occur.  I’m not saying that it’s not good to shoot for compassion in all things, what I’m saying is that we need to understand and be prepared for the consequences, as in the end we will only be delaying the inevitable (as I previously eluded to with the Green Revolution).  I’m NOT advocating eugenics. I am not advocating anything, I propose no solution, just providing facts.  ”The chief cause of problems is solutions.” – Eric Sevareid  ”Humanity does possess in overabundance the elemental means to overcome their temporary limitations; hopefully this can be done with a sense of equilibrium as we assume a “natural” balance among nature. I still strongly assert that in view of the multitude of options, nuclear power (for now) is the best, safest, and most cost-effective way of achieving energy independence. BTW, The USA has ample reserves of uranium to meet our needs for centuries.”  Saying so doesn’t make it so. An overabundance? Do we have an overabundance of fresh water? How about oil? How about viable arable land? Did the Easter Islanders or the Greenland Norse have “overabundance?”  Please provide some numbers indicating that the US has enough uranium to meet its needs for centuries. Be forewarned that I will then demand to know what rates of growth in uranium consumption you project.  Proposing more energy solutions doesn’t address the fundamental problem/issue of excess consumption. If we wanted to be energy independent (of course, this would only last as long as the supporting resource bases allowed), we could be; Brazil is energy independent because their per-capita energy consumption is 1/4 that of the US: and no, it’s not because they produce a lot of ethanol, as ethanol only constitutes about 7% or their total liquid energy use; their sufficiency has to do with oil.   Mark (the original? one)

@ Mark  http://nuclearinfo.net/Nuclearpower/WebHomeEnergyLifecycleOfNuclear_Power  Cost analysis, uranium mass needed for power production, comparison with traditional fuel sources, proven reserves, energy potential from stockpiles.

@Mark  I don’t wish to antagonize or polarize you. In truth, I agree humans are increasingly behaving in population growth like unicellular organisms.  And to my point, those familiar with the atomic periodicity, ionic & covalent bonding, exothermic reactions know that energy and matter are almost infinitely abundant. Both may be converted into each other, none is ever truly depleted but changes form. It is the converting of it easily to our purposes that makes the medium valuable. Is uranium exhaustible, yes. Is the sun, yes. Does the universe tend toward entropy, of course. But I believe the solution is less complex than many make it, that population cap hasn’t been reached, that the future has excellent potential and is much less dire than many make it. And were I to choose, after all considerations, among the many means of converting photochemical, kinetic, chemical, atomic energies to human use, by far I favor nuclear reactor generated electrical power.

@ jd – on 2008-01-27 20:45:53 ”Further, I myself owe nothing to anybody. I am free to say what I feel and unafraid of the consequences. I am perfectly willing to register in order to read and participate with the others here. Some may not be in as fortunate a position. It doesn’t seem to me that the privilege of anonymity was being abused.”   I, too have wondered whether some of this blog’s dedicated and thoughtful regulars are now reluctant, or unable, to post because of concerns about true anonymity being compromised by a registration process ( they may not be able to share a return email address).

Nouriel, here’s a counter-argument: As commodity prices fall due to declining US consumption, it opens up the door for growth in the poorer two-thirds of the world where commodity prices are critical. True, commodity producers will be hit by losses in revenue as well, but in China and India, deflation could actually help growth.   This is one reason why I think coupling may be less strong than you propose.