Article summarizing the US and global economic outlook
Here is below an English translation of an article in the Italian financial newspaper Il Sole 24 Ore that summarized a presentation about the US and global economy and financial markets that I recently made in Italy:
Whoever dares to ask Dr. Doom- Nouriel Roubini – if the crisis has reached its bottom, if the worst is behind us, must also have the courage to hear his answer that can be summed up in two letters, an predictably “no”. According to the professor of economics at New York University, which now enjoys an undisputed reputation worldwide for having predicted well in advance and with an accurate analysis the crisis that has brought the world to its knees, the markets have yet to discount other bad news: he is of the view – in truth he is not the only – that the rise in stock markets in the last few days are a temporary “bear market rally” with more contraction ahead. However, in an intense presentation held yesterday in Milan at a meeting organized behind closed doors by Calyon Crédit Agricole, Dr. Doom gave a glimmer of hope: “there is possibly light at the end of the tunnel,” he said, although with close teeth. That bottoming out however requires a number of conditions: it requires governments and central banks of the countries most affected by the worst recession since the Great Depression of 1929 – the United States, European Union, China and Japan in the first place – “to adopt anti-crisis measures that very aggressive and front loaded”. What has been implemented so far, in terms of fiscal stimulus and monetary policies, including unconventional policies, is not enough. The severity of the crisis is such – “the world economy in danger of falling into the abyss of a near depression” to put it as Roubini says it – that resolving this crisis requires major policy efforts and timely and bold decisions by the governments. Here is a summary of the Doom-thinking on the major open questions that are most relevant to the markets as of 20 March 2009.
Banks The “good news” for Dr. Doom is that after the failure of Lehman Brothers the systemic risk associated with further disorderly bankruptcies of major financial institutions has been reduced: the countries of the G7 and the European Union have admitted that letting Lehman in a disorderly way was a mistake “and promised that they will do everything possible to prevent an event of this scale happening again”. According to Roubini guarantees for deposits and for new borrowing of banks and the recapitalization of banks with public capital are positive developments. However, according to Roubini, much more remains to be done: many American and British banks are still unstable, near insolvent and many institutions will have to temporarily “nationalized”; this will be the proper way to “clean up their balance sheets.” Roubini recommends that the State takes the task of cleaning up the balance sheets of insolvent banks, by taking them over and then separating good and bad assets. You can also expect more bad financial news from banks, insurance companies, hedge funds and even by countries that have committed similar policy mistakes as in Iceland: highly leveraged and troubled institutions will be forced to sell illiquid assets into illiquid markets, thus triggering new lows in global stock markets.
Speaking of toxic securities, Roubini said, because its estimates on the losses of the banking system worldwide (3,600 billion dollars) are worse than those of the IMF (2,200 billion) because the IMF estimated the losses based on current delinquencies and charge off rates while Roubini forecasts are based on projections of what losses will be at the peak in a year from now in a reasonable macro scenario. Dr. Doom prefers the Swedish model of cleaning up banks because the Japanese model, “keeping alive zombie banks,” turned out a failure that prolong the depression. Finally, among the short-term initiatives that can help to resolve the crisis Roubini discussed appropriate forms of a suspension of mark-to-market accounting and the temporary easing of capital requirements of banks.
Recession: V or U or L Dr. Doom had already foreseen a long and protracted U-shaped recession for the world economy when the prevailing view was of a short and shallow V-shaped recession for the US. Roubini yesterday made it clear that his estimate for the length of the recession in the U.S. is moving from 24 to 36 months, with an unemployment rate in the U.S. that is heading towards 10%. Its “U” in the meantime is worsening day by day. “If the Obama Administration and the rest of the world will not intervene in drastic manner, with anti-crisis fiscal and other policies even stronger than those announced, the” U “is likely to turn into a” L “, i.e into a near-depression.” The forecasts by Roubini about the global economy are bleak. “Do you remember the saying that when the U.S. sneezes, the world catches a cold. Well now the United States have a severe chronic case of pneumonia.” Why does Roubini sees a gloom on a global scale and does not believe in “decoupling” (according to which Europe and other economies can grow without following the U.S. in its recession)? Yesterday, he argued that excesses of leverage also existed in many countries outside the US: the “too much” leverage (excessive borrowing of households to purchase homes and/or auto loans, student loans, and broader consumer credit) was prevalent also in the UK, Spain, Ireland, Iceland, some Baltic states, Emerging, Europe, Dubai, etc. According to Roubini, if the growth in China slows from 10% to 5% as likely this year that is a “hard landing” for China.
Another source of vulnerability for the world – according to Roubini – is the risk of financial and currency crisis that is affecting a number of emerging countries in Europe: Latvia, Estonia and Lithuania, Pakistan, Korea, Indonesia, Venezuela and Ecuador were all been mentioned yesterday. For all these reasons the forecasts of Dr. Doom on the likely contraction of the global economy in 2009 have deteriorated from -0.5 to -1.2 percent. “In other times the world growth below the threshold of +2.5% was bad news as that is the signal of a global recession.”
Break the vicious circle There may be light at the end of the tunnel according to Roubini if the right policies are undertaken. Governments and central banks should commit to “break the vicious circle”, the lack of confidence that is hindering real investment spending by companies that are solvent and that is leading sound households not to spend. What must be avoided is a situation where small, medium and large-sized solvent firms fail because of the lack of credit, i.e. the liquidity and credit crunch that hurts even sound enterprises unable to roll over their debts. Firms are reacting to the falling demand by investing less and reducing production and unemployment as their goal is to survive the crisis by saving cash. But the loss of jobs or the risk of becoming unemployed restrains the consumption of households. In this scenario, Roubini points out that banks that are under-capitalized, as many are, are being forced to reduce their risks and thus provide even less credit. And it is in this area, the NYU professor, that governments and central banks can play a crucial role with interventions to assist small and medium sized enterprises and households at risk of going bankrupt because of the lack of credit; therefore, government guarantees of lending and recapitalizations of banks can help. In short, governments and central bank are the only agents who take actions to prevent a worse recession. “Partially socializing the losses of banks, firms and households, transferring to the public sector the losses of the private sector will be very expensive public debt-wise; but it is the policy medicine that can help an L-shaped near depression” in the words of Roubini.
Deflation and inflation Roubini argues that one should not be concerned about future high inflation. As he explains. “If a patient comes into the emergency room and is in a coma fighting to survive, I simply don’t believe that doctors in such a situation should be concerned about the diet of the patient and tell him to first exercise, go on a diet and lose weight if he is overweight, or first to convince him to stop smoking: first of all you need to do something immediate to prevent the patient from dying.” Well, a recession that threatens to turn into a depression that is like a near death experience for the global economy: and that is why Dr. Doom (who during the conference yesterday he spoke of a small but rising risk of collapse of the global economy and the risk of a global depressionary catastrophe) urges governments and central banks to focus on the risk of deflation. Prices will fall because firms have an over-supply of unsold good that they will try to dispose of by reducing prices. Roubini also argues that commodities prices, despite recent decreases (even by 60% for oil), may drop further, fueling the deflationary pressures. He sees “more downside risk” for oil and gold prices. As demand and consumption falls below production, prices fall and firms cut back production and employment leading to another round of falling demand; this is the vicious circle that governments need to prevent.
The role of central banks Having mentioned the specter of a “liquidity trap,” Roubini argued yesterday that policy rates dow to zero and quantitative easing (creating base money through the purchase of securities in the market) is necessary but not sufficient. According to Dr. Doom central banks must do more. So far they have done too little too late. Their goal should be to reduce market credit spreads that right now are so high that they are pricing the risk of a depression. The fact high yield spreads of corporate bonds are 2,000 basis points above Treasuries is likely excessive. According to Roubini, given the likely rate of defaults and recovery rates in case of bankruptcy short of a depression outcome, a 2,000 basis points spread implies that high yield corporate bonds are cheap. But the high yield bond market is frozen. That is why central banks consider buying some private assets with greater credit risk; “while this would increase the risks on the central banks balance sheet this is necessary to reduce the excessively high market spreads.” As for the ECB, Roubini is critical of this central bank as it has done too little too late to reduce its policy rate (that is still a long way from the zero bound in the Eurozone) and is still behind the curve in considering and implementing quantitative easing. The objective should be to ease the credit crunch with unconventional monetary policy actions and new tools. The risk of inflation from such aggressive easing is so far minimal: in spite of aggressive base money increases the money and credit multiplier has sharply fallen and the quantitative easing has not – so far – increased credit significantly.
The dollar and Treasury bonds Roubini yesterday expressed aloud what everyone thinks: that the United States would like a weak dollar, the Eurozone a weak euro, Japan a weak yen, China a weak yuan, and Switzerland a weak Swiss franc, each as a way to boost their sagging exports and growth. But this is not possible as all currencies cannot be weak relative to each other. So, what is the prediction of Dr. Doom for exchange rates? Without going into much detail, the argument was this: the only true ”AAA” assets in the real world at the moment are US Treasurie. Many previous “AAA” securities issued by banks, industrial companies, as well as those in securitized products, and even those of sovereign states that are shaky like some in the Eurozone, are not true AAA or have been massively downgraded. And if risk-averse investors are still looking for really safe investments, with the highest rating “AAA” they have little choice but that of U.S. Treasuries. Also, even if the Administration Obama fiscal deficits floods the market for government bonds denominated in U.S. dollars, a large proportion of this issuance will be purchased by the Federal Reserve thus keeping rates low. All this means that the U.S. dollar is – in relative terms – still a safer choice for risk averse investors. In the medium term, the dollar will need to depreciate – according to Roubini – but it will not experience an outright collapse because “this weakness is not a trend.”
Global Current Account Imbalances The ideal scenario for the future of the global economy is – according to Roubini – is a more balanced global economy where the US consumes less and exports more reducing its trade deficit, while the Chinese, Japanese and German economies reduce their trade surpluses and rely more on domestic demand as a source of growth. Also, although it will take time governments that have increased their fiscal deficit to GDP ratio and their debt to GDP ratio with draconian anti-crisis stimulus packages will have to restore fiscal discipline to ensure medium terms fiscal sustainability. Roubini argued that saving the world and preventing a depression will have a high fiscal cost:”there is no free lunch”. The cost of the rescue will be steep and fiscal deficit bill will come eventually due when governments will have to increase taxes and/or reduce government spending to service their higher stock of public debt. But, according to Dr. Doom, there is no alternative: “in the long run we may all be dead – to paraphrase Keynes – but in the short run it is more important to avoid by any means an early near-death of the global economy.”
77 Responses to “Article summarizing the US and global economic outlook”
Guest • March 22nd, 2009 at 2:26 pm
i waited long enough, I am first
Guest • March 22nd, 2009 at 2:32 pm
i seem to be all alone here. The walls of this chamber echo with the death of the future
A.W.Bost • March 22nd, 2009 at 2:37 pm
“Dr. Doom (who during the conference yesterday he spoke of a small but rising risk of collapse of the global economy and the risk of a global depressionary catastrophe)” –this might be the most important point i found in the article. What does everyone envision of the world if this prediction becomes a reality. He is basically saying the world will burn in hell, and by that point nothing will matter. Gold at 10,000 and every Country becoming Artic Wasteland. In the short term Peter Schiff might be wrong.
nik og jay • March 22nd, 2009 at 3:40 pm
translated by google???
Tyler • March 22nd, 2009 at 3:48 pm
1) If the markets were an accurate reflection of the current economic state of the nation, the Dow would currently be around 6200. But since the market is speculative- bolstered by greed, fear and the need for investors to constantly seek profit, its hovering artificially higher at the moment. The lastest temporary ‘spike’ was due mainly to corporations with a lot of liquidity on the sidelines purchasing up their own shares to paint a less doom n’ gloom 2Q outlook. This is honestly a terrible time for an individual to enter the market and the media, especially outlets like CNBC and Fox Business should collectively be ashamed for not having at least one person on air advising people to refrain from investing during such volatility.2) The fact that nationally, unemployment is still in single digits and home prices have not drastically fallen across the nation means we’re not close to the economic bottom. I am currently on visiting South Florida as i write this, and while you do have pockets of large foreclosure rates and strip malls with ‘For Lease’ signs, you also have concentrated areas where Mercedes and BMW’s outnumber American and Japanese made cars, affluent people spending money freely and carelessly at affluent malls, and business either thriving or maintaining pre-recession numbers.3) Unfortunately all of the meddling of the current administration in the form of bailouts, loans and other desperation ‘fixes’ will only delay and prolong the inevitable- by the end of the Great Recession, you will see unemployment reach 12-13%, homes collectively will drop another 10-15%, and credit for business and personal use will decrease rapidly as personal credit defaults raise. Quite honestly, this is a good thing. In a credit based economy, all prices for goods and services are inflated about 15-25% because of the ease of using credit to acquire possessions with little to no cash needed down. A store can simply entice sales through credit promotions such as 0% for limited time rather than actually lower their prices a single penny. People collectively have shown to be highly irresponsible with credit and don’t take the time to know their APRs or how to balance their personal checkbooks.In a cash based economy, which we once had and hopefully perhaps will have again, when you go to a store with X amount in your wallet or checkbook, that’s the maximum you can spend. The business will be forced to lower their prices on goods and services to generate income and liquidate inventory, or fold, in which case the objects are able to be acquired for less through wholesalers. Because we currently live in a credit economy, we blindly accept that the median amount for a new car is around $20,000 and a median new home is $200,000. A cash based economy makes those items harder to acquire based on prices as is.. thus you either have lots full of unsellable cars and unoccupied homes, or prices decline to a more reasonable level so people can acquire the essentials of modern life without being in debt for many years in the process. In addition, it forces people to budget more carefully, be more responsible in their expenses, and encourage savings in secure avenues like money markets and CDs.Thus, it is my hope that Dr. Doom is correct that this recession continues another 2 yrs so that we can eventually see genuine changes from a ultra-greedy form of market capitalism into a more altruistic form where profit (small-p) is established and the the ones who come out on top are those with actual savings behind them rather than possessions, credit or FICO scores.
Octavio Richetta • March 22nd, 2009 at 4:24 pm
Professor, if you were still doing work for a grade, you would get an A+ on diz one!
Hayes • March 22nd, 2009 at 4:36 pm
from the prior thread (Note: threads out of order)courtesy David Fry:From the archives – Senate hearings circa 1932
“Did Goldman, Sachs and Company organize the Goldman, Sachs Trading Corporation?” Senator Couzens asked.”Yes, sir,” Mr. Sachs replied.”And it sold its stock to the public?”"A portion of it. The firm invested originally in 10 percent of the entire issue for the sum of $10 million.”"And the other 90 percent was sold to the public?”"Yes, sir.”"At what price?”"At 104. That is the old stock … the stock was split two for one.”"And what is the price of the stock now?”"Approximately 1 ¾.”
US Senator James Couzens with Walter Sachs CEO Goldman SachsSenate Hearings June 1932http://seekingalpha.com/article/111090-friday-outlook-quad-witching
Average Jane • March 22nd, 2009 at 4:38 pm
A very common sense post, Tyler. Thank you. Once again, I see the machinations of TPTB trying to re-inflate “assets” such as housing to the detriment of us all. It is simply unconscionable to again tell a family making $60,000 a year that they can “afford” a $300,000 inflated-value home. We have got to get off the easy credit gravy train. It has bothered me for years that the last new car I bought back in 2003 cost $20,000 which was almost half my gross pay at the time. Time was when you couldn’t get a five-year new car loan. Or have zero down on a mortgage. We have got to get out from under our household debt. We have got to Question Authority. It is not good for We The People to be buried in debt.And I can’t even think about the new private-public partnership plan that is going to give non-recourse loans to hedgies and other high rollers to jump-start the economy. This is making me crazy. Has everyone lost their collective minds? Where has the common sense gone? When are these masters of the universe going to stop bleeding the middle class? We have no money anymore! We don’t! We can’t backstop trillions of dollars of someone else’s debt! We can’t do it! Isn’t anyone listening??
Guest • March 22nd, 2009 at 4:39 pm
Why do I feel that whatever comes out of Washington nowadays boils down to: HEADS THEY WIN, TAILS WE LOSE?
NN • March 22nd, 2009 at 4:58 pm
You mention something that is a key to understanding where the markets are going: the home prices are still too high and they will fall further. Falling home prices is what triggered the meltdown and falling home prices is what keeps digging a deeper hole for the rest of the economy. I don’t see how the consumer spending will resume when everybody will be poorer a year from now. It does not matter if the government gets the credit to flow again. Consumers whose assets are going down will be unwilling to add more debt to their personal balance sheets.
Hayes • March 22nd, 2009 at 5:28 pm
early futures flat to down (based on fair value)Dow 7,261.00 —– Friday close 7,257S&P 500 769.00 —– Friday close 768.50
Hayes • March 22nd, 2009 at 5:32 pm
pls excuse my dyslexia – these are the correct numbers:Dow futures 7,250.00 —– Friday close 7,278.38S&P 500 futures 767.90 —– Friday close 768.54(note futures adjusted for fair value)
Hayes • March 22nd, 2009 at 5:41 pm
Turbo’s press conference at 8:45am Monday – announcing plans to deal with the “misunderstood” toxic assets
OR • March 22nd, 2009 at 5:47 pm
Hayes, weekly roundup thread [unfortunately] has a more recent time stamp, so I am going back there.
OR • March 22nd, 2009 at 5:48 pm
bery timely:-)
OR • March 22nd, 2009 at 5:50 pm
because Ur Psyche is healthy! i.e., Ur feelings are well-aligned with the reality at hand.
Guest • March 22nd, 2009 at 6:02 pm
NEW THREAD
Guest • March 22nd, 2009 at 6:04 pm
The United States Of PonziNouriel Roubini, 03.19.09, 12:01 AM ETA reporter contacted me recently with the following question:”I am a reporter, and I am doing a story on Bernard Madoff’s life after pleading guilty. As part of this, I was wondering if you could comment on what significance he will have in the history of this period. Will he represent more than a scamster who stole a lot of money from a lot of people? As Bernie Ebbers and Ken Lay came to embody corporate greed and deceit, what will Madoff symbolize?”Here is my answer fleshed out in full:Americans lived in a “Made-off” and Ponzi bubble economy for a decade or even longer. Madoff is the mirror of the American economy and of its over-leveraged agents: a house of cards of leverage over leverage by households, financial firms and corporations that has now collapsed in a heap.When you put zero down on your home, and you thus have no equity in your home, your leverage is literally infinite and you are playing a Ponzi game.And the bank that lent you, with zero down, a NINJA (no income, no jobs and assets) liar loan that was interest-only for a while, with negative amortization and an initial teaser rate, was also playing a Ponzi game.And private equity firms that did over a $1 trillion of leveraged buyouts (LBOs) in the last few years with a debt-to-earnings ratio of 10 or above were also Ponzi firms playing a Ponzi game.A government that will issue trillions of dollars of new debt to pay for this severe recession and socialize private losses may risk becoming a Ponzi government if–in the medium term–it does not return to fiscal discipline and debt sustainability.A country that has–for over 25 years–spent more than income and thus run an endless string of current account deficit–and has thus become the largest net foreign debtor in the world (with net foreign liabilities that are likely to be over $3 trillion by the end of this year)–is also a Ponzi country that may eventually default on its foreign debt if it does not, over time, tighten its belt and start running smaller current account deficits and actual trade surpluses.Whenever you persistently consume more than your income year after year (a household with negative savings, a government with budget deficit, a firm or financial institution with persistent losses, a country with a current account deficit) you are playing a Ponzi game. In the jargon of formal economics, you are not satisfying your long-run inter-temporal budget constraint as you borrow to finance the interest rate on your previous debt, and are thus following an unsustainable debt dynamics that eventually leads to outright insolvency.According to Hyman Minsky and economic theory, Ponzi agents (households, firms, banks) are those who need to borrow more to repay both principal and interest on their previous debt; i.e., Minsky’s “Ponzi borrowers” cannot service either interest or principal payments on their debts. They are called “Ponzi borrowers” as they need persistently increasing prices of the assets they invested in to keep on refinancing their debt obligations.By this standard, U.S. households whose debt relative to income went from 65% 15 years ago, to 100% in 2000, to 135% today were playing a Ponzi game.And an economy where the total debt to GDP ratio (of households, financial firms and corporations) is now 350% is a Made-Off Ponzi economy. And now that home values have fallen 20% (and they will fall another 20% before they bottom out) and equity prices have fallen over 50% (and may fall further), using homes as an ATM to finance Ponzi consumption is not feasible any more. The party is over for households, banks and non-bank highly leveraged corporations.The bursting of the housing bubble, the equity bubble, the hedge funds bubble and the private equity bubble showed that most of the “wealth” that supported the massive leverage and overspending of agents in the economy was a fake bubble-driven wealth. Now that these bubble have burst, it is clear that the emperor had no clothes, and that we are the naked emperor. A rising bubble tide was hiding the fact that most Americans and their banks were swimming naked; and the bursting of the bubble is the low tide that shows who was naked.Madoff may now spend the rest of his life in prison. U.S. households, financial and non-financial firms, and government may spend the next generation in debtor’s prison having to tighten their belts to pay for the losses inflicted by a decade or more of reckless leverage, over-consumption and risk-taking.Americans, let us look at ourselves in the mirror: Madoff is us and Mr. Ponzi is us!http://www.forbes.com/2009/03/18/american-economy-housing-bubble-madoff-opinions-columnists-ponzi_print.html
Guest • March 22nd, 2009 at 6:07 pm
NEW THREAD
Guest • March 22nd, 2009 at 6:59 pm
Like an angel, standing in a shaft of light.Rising up to paradise, I know I’m ‘gonna shine.
Michelle • March 22nd, 2009 at 10:12 pm
AJI sent a fourth email to my congressman who also sits on the Senate Banking Committee, this time in response to the loophole-fraught PPP plan. I explained how the very same crooks that got us into this mess are now going to profit at the expense of the taxpayer through fraudulent schemes, and I detailed an example of how simple the process is and how profitable it can be.It is an outright travesty that again the taxpayer is going to be holding the bag while the rich get richer via a blatant and fraudulent wealth transfer.
Foolsworld • March 22nd, 2009 at 10:55 pm
Dr. Doom. Let me give you another analogy with regards to the deflation/inflation issue. Lets assume a patient is higly addicted to a drug which kept a person’s “high” up for a long time, which was created through unrealistic low interest rates. Every normal thinking person would agree that the only real solution to the person’s problem is to get off the drug. (the natural occuring consequence of the free market like the freeze of credit, the decrease of asset prices, etc. already shows how the balancing act of look like) We also know the consequences of a drug withdrawl from a person who was highly addicted to a dangerous drug. It usually comes with mental depresson and physical pain. Dr. Doom’s argument to the current situation would be to provide the patient with more drugs so he never has to experience the unavoidable pain that he MUST experience if he ever wants to get rid of being addicted to the drug. Of course, in this patient’s highly critical situation, he could receive advice from his drug friends (our banker friends) who would probably advise him to avoid this pain by “shooting” one more dosage. Often this final stage results in overdosing of the patient. I guess the Dr. sill wants to hold on to this illusionary Keynesian idea that money printing will resolve the underlying, fundamental issue.
g Anton • March 23rd, 2009 at 12:07 am
Obama says that if Tim Geithner offers him his resignation, he (Obama) won’t accept it. I suggest that Obama offer his own resignation, and let’s see if it is accepted or not.
The Alarmist • March 23rd, 2009 at 3:48 am
What’s truly annoying is one can be so right for so long and still go broke investing/speculating on the unwinding of this mess. Maybe if I borrow the money that I will throw at this I will feel better when I lose it.
The Alarmist • March 23rd, 2009 at 3:51 am
Gee, if the economy doesn’t bring down the house of cards, the collapse of the neighbour to the south might. Or NK will nuke California (which might not be so bad, as it would solve one of the US’s biggest problems). Gee, wargaming this stuff is kind of fun.
Guest • March 23rd, 2009 at 4:17 am
I disagree with some of Prof. Roubini’s comments. In my opinion if the US continues printing massive amount of Dollars, inflation will be a very big problem for US soon (Recently oil prices started to rise in dollar terms). If printing money was a good economic policy Zimbabve would be the richest country in the world.
I.Nart • March 23rd, 2009 at 5:58 am
Why does Prof. Roubini tolerates the nick of Dr, Doom?. First it shows no respect, second it caricaturizes a rigorous and courageous economic analysis, in a time when to say that the “Emperor had no clothes” took the courage of standing alone while the rest of sheep baaa “no problem”. What is implied in the Mr. Doom sobriquet is that here we have somebody that plies its trade of doomster to sell itself. Do not take it Prof., the disrespect implied spreads also to your readers.I. Nart
Guest • March 23rd, 2009 at 6:18 am
Be nice.
CLake • March 23rd, 2009 at 6:18 am
I think your analogy is a good one : by continuing to supply drugs to the addict (trying to fight deflation and reinflate the bubble at all costs, with QE and increasing Govt debt), the patient might risk an overdose (hyperinflationary death spiral).Having said this, if you want to treat the addiction, you can’t just remove the drugs and wait, you need to provide counseling and a temporary medical substitute, otherwise the patient might also die from the consequences of the withdrawal.Up to now, the Eurozone seems to have chosen this course of action : let the deflation follow its course and refuse to supply more drugs to the patient (smaller deficits and no QE), but it provides a social welfare cushion as temporary substitute.In the USA and Britain, the choice is clearly to keep the addict on drugs.The result will be that in 2010, the USA and Britain will experience a new high, they will get the impression that they are getting out of the recession faster than everybody else, whereas the Eurozone will still be dealing with withdrawal in 2010.But the real turning point will be 2011, that’s when the overdose will come for the USA and Britain, as they will have no other choice then than to keep supplying even more drugs to the addict : nobody thinks they are going to take the risk of entering a recession by reducing the deficits and raising taxes, now do they ? The choice will be to wipe out the debt with hyperinflation.
Guest • March 23rd, 2009 at 6:28 am
“What does everyone envision of the world if this prediction becomes a reality?”The sun will still rise and life will go on.
Guest • March 23rd, 2009 at 6:32 am
Why can’t you call him by his correct name? Why Turbo? It’s silly.
Mark • March 23rd, 2009 at 6:33 am
Why would NK, which doesn’t have deliverable nukes (if even any at all), “nuke California?”MarkP.S. If you live in the States there’s a high probability that some of your food comes from CA.
Guest • March 23rd, 2009 at 6:42 am
Why should Obama resign? The person who should have resigned was Bush. Eight years of that clown’s misguided policies dug us deep into this economic trench. Note: I did not say there were not misguided policies prior to Bush, but Bush’s extreme laissez-faire regulatory ideology allowed amoral and what should be criminal behavior to rule the day. Here, we have the result. Obama is a good man with high intelligence (versus Bush’s thumb sucking level IQ) and he still has my vote.
generalKurtz • March 23rd, 2009 at 11:15 am
what caused all this mess was credit expansion. It created an asset bubble which is bursting now. But now, American administration will create another bubble when solving this one. Extremely low interest rates, excessive money supply and huge deficits…Look at Japanese sample. They created the decade long recession while fixing a sluggish economy. The economy was slowing down and they opened the money tap by reducing the interest rates to stimulate it. But this, at the end, created a huge asset bubble like just before this crisis in the world… Then you know what happened later.I don’t believe inflation will not be a problem. It will be very soon. How can you fix this near depression crisis without creating a huge bill for the future generations? I think Obama’s team has to sit back and think about how to use their last pennies. Throwing money at it will not solve it for sure… They still have not reduced the debt burden of the households which I think is the main issue here. Also Geithner’s plan SUCKs!!!! He has to nationalize these banks!
Stratonovich calculus • March 23rd, 2009 at 12:01 pm
Taibbi on the meltdown. Don’t miss it — feces thrown on everyone.
London Banker • March 23rd, 2009 at 12:05 pm
Anybody else here think that Geithner looks like a Wagnerian anti-hero? Something about the pointy ears and the little eyes just screams Sigfried . . . he does not know fear nor understand treachery . . .Hmmm. I’ve just read the Wikipedia precis of Sigfried, and realise that a bloke that can’t tell his grandfather from a tramp, or a woman from a warrior, is very likely to be too screwed up to be much use to us poor souls confronting the dragon of deflation.http://en.wikipedia.org/wiki/Siegfried_(opera)
Guest • March 23rd, 2009 at 12:31 pm
Clearly the govenment is not going to nationalize the banks. They are going to take the bad assets off of the banks balance sheet and pass the loss on to the taxpayer. Nouriel has said in the past that if we go in that direction that we will be making the same bad decisions that Japan made which caused them a “lost decade”. Nouriel has a tough task now of making predictions as to what the future holds for our economy given the governments refusal to put the banks into receivership and punish those that are responsible for this crisis. The government is hell bent on socialism. What now does the future hold?
Guest • March 23rd, 2009 at 1:14 pm
Most of these thoughts are recycled from the past 12 months. If you see light, is it dim or bright? The stock market says it’s a bright green light.
Guest • March 23rd, 2009 at 1:32 pm
If CA goes down down, it all goes down. I’m so tired of people not getting how dependent so much of the country is on CA.
MA • March 23rd, 2009 at 2:00 pm
Hey LB… did you read the plan…I know you like Zoolander, so I’m throwing out the most appropriate quote: “I feel like I’m taking crazy pills!!!”Let’s call this what it is: Trickle down “stock-enomics”Miss America – Rich Hartmann
Artic Wind • March 23rd, 2009 at 3:21 pm
Bailout the bankers, bailout Wall Street wizards, save the rich and the rest of the economy will benefit… (insert mad laughter) Ha, ha, ha, ha, ha, ha, ha, ha, etc…The power of wall street on our government is awe strickingly sobering! The election ballot is the civil weapon to counter the influence. How long will this weapon be deemed adequate by the masses? Civil unrest, from protest to riots, are in the cards. Propagandize and euphemize the government “support” for an economic turnaround all you want… it still looks, smells and tastes like sh$%! A dual class society is not going to cut it when the underclass (formerly known as the “middle class” and poor) is huge relative to the financially “elite” class. The dividing line of classification will not be in how many millions you have, but whether you have a job, a house, a car, medical care, retirement hopes, and can afford to support your kids going to college. We all better hope the majority of people in our society can do those things or the economic divide among the haves and have nots could easily drive us to Civil War II with the old and the young paying the highest price (as usual).
sns • March 23rd, 2009 at 3:30 pm
re: today’s market surge:for your detention you shall write one thousand times:DEAD CAT BOUNCE.
Guest • March 23rd, 2009 at 3:41 pm
Very well said!In a remotely sane world Dr Roubini would be appreciated, not mocked. The professor is an exceptional individual, at the top of his field. He is very smart, honest and undoubtedly gifted. Nothing but admiration and deep respect from this corner!
Anonymous • March 23rd, 2009 at 4:40 pm
One good reason for Obama to resign would be that he says one thing and does another. But perhaps that is what lawyers do. What happened to his promise for change in Washington? So far he seems to be doing exactly the same things as his predecessors. Most of his important appointments are old insiders (Biden, Geitner, Clinton, Summers, …). The financial policies promulgated by Geitner are a rehash of those proposed by Paulson dressed up with a little tomato sauce. One thing becomes clear as time goes by, Obama is a good politician no different from the rest.
Anonymous • March 23rd, 2009 at 4:50 pm
Question : Who actually runs the U.S. economy?1. Tim Geithner?2. The Fed?3. Wall Street?4. Big business?5. The wealthy elite?6. Other?Answer: Probably those profits most from these bailouts.
Guest • March 23rd, 2009 at 8:02 pm
Embattled bank JPMorgan Chase, the recipient of $25 billion in TARP funds, is going ahead with a $138 million plan to buy two new luxury corporate jets and build “the premier corporate aircraft hangar on the eastern seaboard” to house them, ABC News has learned.http://abcnews.go.com/Blotter/story?id=7146474&page=1
Rcoutme • March 23rd, 2009 at 8:33 pm
Professor Roubini did not say that there would be no inflation. He said that inflation would, in fact, occur. What he said was that the problems of inflation would be better than the ‘untreatable’ problem of DEFLATION.
Rcoutme • March 23rd, 2009 at 8:38 pm
Just a thought:How to fix Corporate AmericaProblem: CEO’s make too much, or Americans believe they make too much (they would also include other top officers in companies).Solution: We are talking about publicly traded corporations only. If somebody owns a private corporation (or has it with select partners and the portions are not publicly traded) then the following would not apply. Basically anyone who owns his own business has the right to do what he wants (within the framework of current laws).1. No one employed by a publicly held corporation may be paid salary more than twenty times (20x) the amount of the lowest-paid person working for that corporation (more or less full time.) Note that I said, “working for”, not “employed by.” The distinction is critical! When I worked for McNeil Consumer Products (subsidiary of Johnson & Johnson), they hired a cleaning agency to clean the place at night. They also hired an agency to handle security. Those people worked full time (more or less) at the facility—so their pay would be included in the calculation.2. The exception to the pay would only be allowed in stock options. The stock options could be at a level no less than the price of the stock on the date of issuance of the option (i.e. earning the option) or the price of the stock on the day the employee started his current position—whichever is higher. This is needed to prevent boards from rewarding CEO’s who have lost half the value of the stock for gaining back some or all of the value lost during their time.3. The stock options could not be executed for three years from date of issuance.4. There should be a limit to the stock options offered as enticement (in other words, no offering 1 million options to someone just because he starts day 1).5. Benefits could be partially excluded from these calculations. I would suggest, however, that some sort of commensurate level be applied. For instance, I will grant that a corporation has a reason to provide a limo for transportation of their top executives (you want them at work). This need not be applied to each and every employee. However, some sort of rationality needs to be fixed into the system. In my opinion, the corporations should not be paying for vacations to exotic locations (other than bonuses, which would be included in salary calculations) for their employees.6. How to handle bonuses and commissions: Some people ‘earn’ much of their money through direct measure of their performance. Examples abound, but the current financial fiasco has flagged quite a few of them. Answer: Those who immediately net income for the corporation may be exempted from these limitations. Those who ‘sell’ assets that do not immediately realize the benefit to the company may not be exempted. For example: if someone sells (for delivery this year) twenty million sets of cookware for which he is paid $100 commission each, he can be paid his $2 billion (please note that the figure and the item don’t really qualify to reality). On the other hand, if someone sells portions of derivatives totaling $20 billion, but the corporation must invest $80 billion to create the derivatives, then the corporation has not netted any value until that $80 billion is secured. The second employee’s salary would not be permitted to rise above the limit (other than stock options).7. Here is how this would change corporate America as we know it: top executives in a corporation would virtually have to care about the long-term welfare of their corporations. Much of their compensation would be tied up in the long-term welfare, so if they underperform over the long-term, they get nothing. The current financial crisis arises from CEO’s and other top executives constantly worrying about the stock price for the next quarter. If their compensation is tied up with the stock price three years hence, that is where their focus is likely to remain.8. Please note that this does not really limit any employee’s compensation. If the corporation prospers, so will any employee with stock options. Meanwhile, bloated salaries of underperforming executives will (more or less) be a thing of the past.9. When it comes to musicians, sports figures and other entertainers, the law would likely never apply. Why? Because they do not work for publicly traded corporations. In addition, only corporations that operate in more than one state would be affected (due to interstate commerce) as companies that do all their business in a single state are not subject to federal laws.As an example, Disney stock was trading at 0.9 on March 1, 1980. The split adjustment factor for that time is 48. The stock closed at 16.77 on March 1, 2009 (with a split adjustment factor of 1). It closed at 15.88 (with a split adj of 3) on the same date in 1994. That means that the stock appreciated from 0.9/48 to 15.88/3 during those 14 years. Thus: one share of stock in 1980 went from a value of 90 cents to $254.08. That is rather good appreciation in 14 short years. Michael Eisner should be proud of his achievement.If these rules were in effect during that time, any stock options Mr. Eisner had been issued in March 1, 1980 that were cashed in on March 1, 1994 would have netted him about $253 per share. If it were 1 million, well, so be it—he earned it. If he chose to cash them in as soon as he was allowed (1983), he would have received $1.61 per share (a net of 71 cents—still rather good if we are talking about 1 million shares).Since we are not limiting (or perhaps are limiting, but only to reasonable levels, thus not offering one thousand times the number of shares actually trading) how many shares the corporation may offer, there is no limit to the amount of compensation an employee could make. We are simply delaying when that employee may begin realizing the extra compensation.The reason that this would work in this country is that most Americans have no problem with someone earning his way to billions of dollars. They only have a problem with someone receiving billions while depriving those for whom he works of their assets. A three-year delay would prevent the short-term thinking that dominates most of corporate America. It would not deprive higher-paid employees of their ‘just’ compensation; it would facilitate it. Furthermore, any employee who moved from one corporation to the next would not want to ‘sabotage’ his previous employer for the benefit of his current one, as much of his compensation would still dependent upon his previous employer’s success.
Anonymous • March 23rd, 2009 at 8:40 pm
The election ballot isn’t working at least at the national level. Hasn’t really for quite some time now as there is essentially only one party. Corruption and corporate/lobbyist influence has to take second priority over the public’s interest. The entrenched politicians today have the latter’s priorities.Something else needs to be done.AM
Chignos • March 23rd, 2009 at 9:42 pm
Obviously you have no experience with addicts. The truth is that addicts do not die in withdrawal at all. They do not need medication as a temporary substitute. Counseling doesn’t work (the preposterous proposition that you could talk a drug addict out of his addiction!? You’re not talking to a human being, you’re talking to a drug.) It’s time for all of us to get our heads around reality. Addicts support the fanatics who want to destroy our civilization, whether they push drugs or bailouts, whether they are fascists or tax cheats.
Merc • March 23rd, 2009 at 10:18 pm
In an essay posted on the People’s Bank of China’s website, Zhou Xiaochuan, the central bank’s governor, said the goal would be to create a reserve currency “that is disconnected from individual nations and is able to remain stable in the long run, thus removing the inherent deficiencies caused by using credit-based national currencies”.http://www.ft.com/cms/s/0/7851925a-17a2-11de-8c9d-0000779fd2ac.htmlAny thoughts?
Anonymous • March 23rd, 2009 at 10:20 pm
And by extension Roubini himself is a pusher, a pusher of massive stimulus, credit creation, monetary supply increases. He wants to reflate the bubble and restore asset prices to their pre-meltdown levels. But government can do whatever it likes to extend and offer credit to all comers, whether businesses or individuals, and if they fear going into debt, they will not borrow and the economy will not expand. Therefore, while Roubini’s analysis may be spot on, his proposed fixes won’t work. IMO, he knows the L-shaped depression is inevitable but doesn’t want to say that out loud. Stay tuned, though. He will say it soon enough.
Anonymous • March 23rd, 2009 at 10:25 pm
Another thing that has become clear is that most voters still see things in terms of Republican vs. Democrat rather than the elite class vs. everyone else. The elites have gamed the system and voters respond like rats in a psych lab to every stimulus the MSM uses on them. Until citizens stop this behavior, the system will continue to perpetuate itself and benefit the banksters at everyone else’s expense.
Guest • March 23rd, 2009 at 11:42 pm
in that case, let’s hope ‘the Big One’ does not strike this century.Although came to think about, hopefully no major volcano eruption in Oregon/Washington also does not happen as that could always trigger some tremors further south. Or if they are all interlinked maybe it starts with that caldera in Yellowstone national park…help…
Ali Mogharabi • March 24th, 2009 at 2:30 am
Was just wondering what Dr. Doom thinks of this latest Geithner spiel? I’m assuming he’s pretty happy about it as it represents more govt intervention to artificially make bank balance sheets look good, dollar will weaken (more than he says) which will help exports, agriculture, tourism, lodging, etc. Of course this little push in the economy will only be temporary as companies remain reluctant to hire back, CF per household remains low, possibly higher foreclosures and a slower clean up of the home inventories, higher savings per household, and consumer spending will continue to decline (which is 70% of our GDP).But the more important question is how will these so called assets be valued???? If this creates liquidity in the mkt for these assets, then why would some banks wanna sell? Especially when they see private/treasury bid on those currently valued 30c on the dollar assets, with around 50c? Couldn’t we get another standstill in this so-called asset mkt?Lastly, if all of this stuff were to work, it would basically result in households going back to being highly leveraged! Is this what we really want – loan to anyone and hope they will spend it on something? I’m just hoping everyone is smart enough not to borrow, and save more.Any response would be appreciated.
Guest • March 24th, 2009 at 6:10 am
One could wonder why the polluter pays principle does not apply in financial markets and in the presence of toxic assets.
Guest • March 24th, 2009 at 11:57 am
I absolutely agree with you. Dr. Roubini has been great, but his advocates of unending stimuli and bailouts will not only prolong the pain of an addicted patient, but also destroy his precious cardiovascular and central nevous system, eventually leading to death. I am worried the end of current political system because of destruction of stock market, our savings, pension system, social security, medicare, dollars, and America. What comes next?
Guest • March 25th, 2009 at 6:46 am
You must be kidding with your comments. That horse’s ash Bush spent trillions the government did not have (go watch the Frontline documentary on this, the fiscal irresponsibility is unbelievable–he essentially bankrupted our country), waged war on a country based on (knowingly) false premises, detained people in Guantanamo despite knowing they were innocent so that he and Dick Cheney could save face, and trampled on the constitutional rights of citizens. Obama says one thing and does another? I don’t see that at all. So who is it you want in office?
Guest • March 27th, 2009 at 11:50 pm
Here is one good reason for Obama to resign – Bloomberg headline: “Obama Seeks JPMorgan, Goldman, Citigroup Support on Bank Plan”. These firms need to be ring fenced and imploded, not asked to be part of the solution. Unfortunately it seems that the corruption evident under Bush is endemic to the entire US leadership. Only a Ron Paul type can possibly save the US now, and who would finance his campaign?
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