Nouriel Roubini's Global EconoMonitor

A Global Perfect Storm

From Project Syndicate:

Dark, lowering financial and economic clouds are, it seems, rolling in from every direction: the eurozone, the United States, China, and elsewhere. Indeed, the global economy in 2013 could be a very difficult environment in which to find shelter.

For starters, the eurozone crisis is worsening, as the euro remains too strong, front-loaded fiscal austerity deepens recession in many member countries, and a credit crunch in the periphery and high oil prices undermine prospects of recovery. The eurozone banking system is becoming balkanized, as cross-border and interbank credit lines are cut off, and capital flight could turn into a full run on periphery banks if, as is likely, Greece stages a disorderly euro exit in the next few months.

Moreover, fiscal and sovereign-debt strains are becoming worse as interest-rate spreads for Spain and Italy have returned to their unsustainable peak levels. Indeed, the eurozone may require not just an international bailout of banks (as recently in Spain), but also a full sovereign bailout at a time when eurozone and international firewalls are insufficient to the task of backstopping both Spain and Italy. As a result, disorderly breakup of the eurozone remains possible.

Farther to the west, US economic performance is weakening, with first-quarter growth a miserly 1.9% – well below potential. And job creation faltered in April and May, so the US may reach stall speed by year end. Worse, the risk of a double-dip recession next year is rising: even if what looks like a looming US fiscal cliff turns out to be only a smaller source of drag, the likely increase in some taxes and reduction of some transfer payments will reduce growth in disposable income and consumption.

Moreover, political gridlock over fiscal adjustment is likely to persist, regardless of whether Barack Obama or Mitt Romney wins November’s presidential election. Thus, new fights on the debt ceiling, risks of a government shutdown, and rating downgrades could further depress consumer and business confidence, reducing spending and accelerating a flight to safety that would exacerbate the fall in stock markets.

In the east, China, its growth model unsustainable, could be underwater by 2013, as its investment bust continues and reforms intended to boost consumption are too little too late. A new Chinese leadership must accelerate structural reforms to reduce national savings and increase consumption’s share of GDP; but divisions within the leadership about the pace of reform, together with the likelihood of a bumpy political transition, suggest that reform will occur at a pace that simply is not fast enough.

The economic slowdown in the US, the eurozone, and China already implies a massive drag on growth in other emerging markets, owing to their trade and financial links with the US and the European Union (that is, no “decoupling” has occurred). At the same time, the lack of structural reforms in emerging markets, together with their move towards greater state capitalism, is hampering growth and will reduce their resiliency.

Finally, long-simmering tensions in the Middle East between Israel and the US on one side and Iran on the other on the issue of nuclear proliferation could reach a boil by 2013. The current negotiations are likely to fail, and even tightened sanctions may not stop Iran from trying to build nuclear weapons. With the US and Israel unwilling to accept containment of a nuclear Iran by deterrence, a military confrontation in 2013 would lead to a massive oil price spike and global recession.

These risks are already exacerbating the economic slowdown: equity markets are falling everywhere, leading to negative wealth effects on consumption and capital spending. Borrowing costs are rising for highly indebted sovereigns, credit rationing is undermining small and medium-size companies, and falling commodity prices are reducing exporting countries’ income. Increasing risk aversion is leading economic agents to adopt a wait-and-see stance that makes the slowdown partly self-fulfilling.

Compared to 2008-2009, when policymakers had ample space to act, monetary and fiscal authorities are running out of policy bullets (or, more cynically, policy rabbits to pull out of their hats). Monetary policy is constrained by the proximity to zero interest rates and repeated rounds of quantitative easing. Indeed, economies and markets no longer face liquidity problems, but rather credit and insolvency crises. Meanwhile, unsustainable budget deficits and public debt in most advanced economies have severely limited the scope for further fiscal stimulus.

Using exchange rates to boost net exports is a zero-sum game at a time when private and public deleveraging is suppressing domestic demand in countries that are running current-account deficits and structural issues are having the same effect in surplus countries. After all, a weaker currency and better trade balance in some countries necessarily implies a stronger currency and a weaker trade balance in others.

Meanwhile, the ability to backstop, ring-fence, and bail out banks and other financial institutions is constrained by politics and near-insolvent sovereigns’ inability to absorb additional losses from their banking systems. As a result, sovereign risk is now becoming banking risk. Indeed, sovereigns are dumping a larger fraction of their public debt onto banks’ balance sheet, especially in the eurozone.

To prevent a disorderly outcome in the eurozone, today’s fiscal austerity should be much more gradual, a growth compact should complement the EU’s new fiscal compact, and a fiscal union with debt mutualization (Eurobonds) should be implemented.  In addition, a full banking union, starting with eurozone-wide deposit insurance, should be initiated, and moves toward greater political integration must be considered, even as Greece leaves the eurozone.

Unfortunately, Germany resists all of these key policy measures, as it is fixated on the credit risk to which its taxpayers would be exposed with greater economic, fiscal, and banking integration. As a result, the probability of a eurozone disaster is rising.

And, while the cloud over the eurozone may be the largest to burst, it is not the only one threatening the global economy. Batten down the hatches.

39 Responses to “A Global Perfect Storm”

CurtJune 15th, 2012 at 8:12 pm

Imbalances in trade lead to debt problems, the exposure of which lead to panic and a crash.

There was very little leadership which contributed to the crash. Most of the problems of that time have not been solved including the of the American consumers balance sheet, and China wanting to base so much of its economy on exporting to Europe and America. The banks in America were to big to fail and now they are too bigger to fail.

The low interest rates help corporations refinance their loans at very low rates and they cut payrolls increasing profits. Good for them.

Now we have all the old problems haunting us and a set of new problems becoming ever more apparent. The old tools were not successful in themselves and they are not so available now.

The Europeans with their solution of the week and the Republicans with their cut spending, taxes and regulation seem well clueless. Obama seems unable to formulate and get across an exciting alternative.

So if things were bad the last time then they should be worse this time.

Someone needs to lay out plans in very clear language that the average person can understand. They must be clear , doable, and even exciting. If this does not occur I would see organizations whether they are countries, companies, or individuals pulling back on their spending result in what will truly be a great depression.

Mantenidis KJune 15th, 2012 at 9:50 pm

I feel the real need to thankful Miss Vicky Pryce (European economist) who today at Bloomberg tv set the Greek “problem” as an ordinary Greece’s citizen understands it.
The pro Euro or exit Euro meaning of the election ballot question, that has been set by eastern mme and leaders-members of old corrupted parties and their partners, is a big false.
Tthat means, a corrupted nepotistic state’s banksters-enterpreuners-“politicians” nomenclature has driven the country in a non solvent debt mess through a client public administration’s corruption of every kind!
She Spoke about the huge armament “investments” to back Turkish threatens.
Also that this is a Euro zone Sovereign debt crisis and not just Greece’s one!
P.S. Greece’s production capacity has decline since the euro era, because of the EU application of agriculture and other subsidies.
A patrimonial fiscal reform asked by Syriza’s leftist party (material and non, including off sore accounts and “companies”) will demonstrate the real thieves, that means the corrupted nomenclature from ’96 to ‘12!
So Billions of “black” euros have “flied” from Greece to fiscal off sore paradises, Cayman islands, Luxemburg, Swiss, UK, USA and Germany’s banks accounts!
Greece’s citizens are starving, while members of old corrupted parties and their partners and parents, corrupted nepotistic state’s banksters-enterpreuners-“politicians”-administration nomenclature are waiting the new era’s Geuro arrival!

Mantenidis KJune 15th, 2012 at 10:49 pm

After Yugoslavia, Iraq, Afganistan, Libya, now Syria, next Iran's people genocide, for a real petrolio USA "democracy"!

buzzJune 16th, 2012 at 2:21 am

In the immortal (paraphrased) words of Jon Stewart: There can't be as many perfect storms as pundits say there are. Maybe these are ordinary storms and we're just on a shitty boat?

lucad10June 16th, 2012 at 12:05 pm

A full free x-rate floating regime for renminbi and a sort of new Marshall plan from US to EU may support growth.

As US interest rates remain low, while Germany does not want to implement eurobond, an increase in T-bonds issuing whose resurces should be forwarded to EU may be an alternative way of funding growth.

A reform for banks regulation (back to Steagall Glass act) and a more fair tax system towards rich people should brighten up our future.

benleetJune 16th, 2012 at 3:41 pm

"In addition, a full banking union, starting with eurozone-wide deposit insurance, should be initiated," — avoiding capital flight when for example Spaniards shift deposits into other Euro-zone national banks or into U.S. equity and bond markets. Widely distributed growth, balanced growth, shared prosperity is the central problem, avoidance of crippling financial punishment that reduces economic activity. Avoidance of unsustainable speculative bubble growth. Sharing gains, cooperation not one-sided victory. Solution may run counter to capitalism's competition motif.

observerJune 17th, 2012 at 3:28 am

Equity markets fell for a few days, but continue to keep going up on "hope" that the central banks and the fed will provide plenty of liquidity to soften the blow of a Greek exit and problems with a Spain bailout. I disagree that equity markets are falling, what do you think about the continued meltup?

YataJune 17th, 2012 at 5:04 pm

Yes, without an iota of doubt there should be a euro-zone deposit insurance policy implemented. As the world economy continues on with it's myopic design of exchanging old debt for new in hopes not addressing the economic fundamentals, this policy would offer one more harbor in the storm, as with BAC's bid to have the FDIC insure $75 Trillion in derivatives,
the banking institutions of the euro-zone would have one more backstop (and hostage) in a global game of economic denial.

"We had no Idea"

EconomartJune 17th, 2012 at 9:30 pm

Hello Nouriel,

Here is a solution to the Greek problem. If anyone can find the flaw, I shall be more than happy to give him or her $50,000. I am just tired of doing this.


The costs of borrowing for a nation to fund public expenditures, if it borrows solely from its resident citizens and in the nation's currency, is nil.

Why? Because if, in adding a financial debt to a community, one adds an equivalent financial asset, the aggregate finances of the community will not in any way be altered. This is simple reasoning confirmed by simple arithmetic.

The community is the source of the government's funds. The government taxes the community to pay for public services provided by the government.

Cost of public services is $10 million.

Scenario 1: The government taxes $10 million.

Community finances: minus $10 million from community bank accounts for government expenditures.
No community government debt, no community government IOU.

Scenario 2: The government borrows $10 million from solely community lenders at a certain interest rate.

Community finances: minus $10 million from community bank accounts for government expenditures.
Community government debt: $10 million;
Community government bond: $10 million.

At x years in the future: the asset held by the community (lenders) will be $10 million + y interest. The deferred liability claimed against the community (taxpayers) will be $10 million + y interest.

The value of all community government debts when combined with all community government IOUs or bonds is zero for the community. It is the same $0 combined worth whether the community pays its taxes immediately or never pays them at all.

So if a community borrows from its own citizens to fund worthy public expenditures rather than taxes those citizens, it will not alter the aggregate finances of the community or the wealth of the community any more than taxation would have. Adding a financial debt and an equivalent financial asset to a community will cause the elimination of both when summed.

Whatever financial benefit taxation possesses is nullified by the fact that borrowing instead of taxation places no greater financial burden on the community.

However, the costs of Taxation are immense. By ridding the nation of Taxation and instituting borrowing to fund public expenditures, the nation will shed all those costs of Taxation for the negligible fee of borrowing in the financial markets and the administration of public debt.

Gary Marshall

FeliceJune 18th, 2012 at 6:32 am

I live in one of the "trouble" Country of Eurozone, Italy. So, I should hate Angela Merkel for her lack of flexibility. She does not want this, she does not want that… But I cannot hate her. We are inside a perfect storm, true. And, if the ship sinks, also Germany (the strongest part of the crew) will sink. True. And of course the "strongest part" must do the huge part of the work, to save the ship, its passengers, and themselves. True. But ALL people on board MUST take their part. If the Italians go on playing mandolino, if the Greeks dance Sirtaki and Spanish Flamenco, we cannot ask Germans to do all the work while we dance. So, Germans are right when they say that everyone must do his own duty.

FeliceJune 18th, 2012 at 6:32 am

Germans have done a lot for eastern countryfellows after reunification, but they pretended them to do their own part. And I am sure they paid a very high price. But now Germany works much better than other Countries. The same must happen for Europe. In Italy now we are trying to do our part, after years of fancy clowns in power. We must show that we can do by ourselves. After that we can ask external help, if necessary. But in 2013 we will have new elections. What if fancy clowns come back to power? We cannot pay our debt with prostitutes!

SonnyJune 18th, 2012 at 11:00 pm

I think it is also prudent for the captain of the sinking ship to save enough resources to get to shore when the ship goes down. What will save the ship from sinking? It will eventually slip beneath the waves, and the strong may make it to shore.

WilliamJune 19th, 2012 at 1:55 am

The flaw is that government spending rarely produces "an equivalent financial asset". Much of the debt (or tax receipts for that matter) is lost to inefficiency, poor planning or just given to favored groups (cash for clunkers or Solyndra as glaring examples). Also, the money taken can't be used for private enterprise which is the genesis of all wealth. So even a legitimate government expenditure has an opportunity cost and at some point the bond holders will want their money back, with interest. At today's interest rates it's not much of a problem, but as interest rates rise then the budget becomes unsustainable.

FeliceJune 19th, 2012 at 3:20 am

Sonny is touching a very sensitive nerve for an Italian (and not only…). Few months ago, a wonderful cruising ship, Costa Concordia, was sailing off the coast of the wonderful Giglio (Lily) Island. The crazy captain, having fun with some exotic girl, drove the ship against outcropping rocks. The ship was sinking. Well, he succeeded to shore the ship, turned on its side, and escaped the ship while many people were trapped inside and dying. When an officer of the Coast Guard, via radio, intimated him to go back to the ship and help the victims, his answer was "But…it is dark here… and it is very cold…". Don't you think it's happening something similar in the global economy?

MichaelJune 19th, 2012 at 4:34 am

Professor Roubini, how should citizens "batten down the hatches"? Is there a risk to hold assets in currencies? Should citizens allocate more of their wealth to hard assets, such as gold, commodities or even equities of global corporations whose balance sheet are stronger than many sovereigns?

EconomartJune 19th, 2012 at 6:03 am

Hello Willian,

I ask this question in response: How does a bank obtain funds for additional loans? It borrows large sums and lends large sums, indefinitely. It rarely pays back depositors and lowers its aggregate borrowings, which grow over time. It lives on the slim margins between the rate at which money is borrowed at and which it is subsequently loaned at. This is rated a success.

So if a bank can do it, and many corporations, always borrowing greater sums for larger investments, why not a nation?

In short, the loans shall never be repaid, nor the accruing interest. So we have an endlessly growing amount of aggregate liabilities.

Does the fact that a man or firm carries debt automatically translate to financial disaster?

We do not know because we have no idea what the assets this man or firm carries against those accruing liabilities. Once known, we shall have the information to judge.

The question now becomes, does the nation hold assets to satisfy its creditors of the security of its loan?

Well, the nation will hold bonds in the amount of the debts and accruing interest. So if Taxation were abolished, then the nation would be no better or worse off if it chose to borrow instead of Tax. The nation would incur debts for public expenditures just as it would receive assets in the form of government securities and promised interest. Its a wash.

I shall go further. With Taxation abolished, government expenditures will decline drastically. No more favoritism. No more squander. No more corruption. No more vote buying subsidies. No heavy, harmful, and unneeded regulation. Government expenditure will come with a capital charge. And if a project generates returns greater than the charge, fine. If not, then the project is shelved.

Secondly, there is no deterrent on the accumulation of wealth or on productivity. All that worthy activity currently impeded by high taxation and unneeded regulation will disappear, sending growth surging.

These 2 primary factors will come into play and create massive increases in the nation's assets. I conservatively estimate the creation of $2 in the nation's assets, held by its citizens, for every $1 invested by the nation's agent, the Government.

The nation will be far wealthier with the abolition of all Taxation. And so shall Greece.

A lender never wants his money back. He only wants to be reassured of the security of his loan and a good interest return on the funds. If a corporation can create $2 in assets for every dollar invested, wouldn't you count yourself among the lenders? If that corporation were a nation, would you change your mind?

I hope that answers your questions.

Gary Marshall

allinadayJune 19th, 2012 at 7:42 am

Economart, you present why borrowing from within has no net cost. Hence its superiority to taxation. However, taxation has no net cost either using your same logic. Money is taken from some and distributed to others… net wealth is unaffected. One could even make the case that taking the money from those who are not incented to spend and giving it to others who will quickly spend it will create wealth, on net again, because of the increase in the velocity of money.

Jonathan DerryJune 19th, 2012 at 3:33 pm

It appears to me that the problems in the global economy began when Nixon abandoned the gold standard in 1971. World leaders need to design a new economic order as they did with Bretton Woods in 1944 because the present order no longer works. What we are now witnessing is a return to protectionism, extremism, stagnation and high unemployment. People shouldn't take democracy for granted in Europe.

Deva SagayamJune 22nd, 2012 at 4:11 am

Germany will not be fixated on anything else but German interests.
Right now it appears that its interests are different from other EU countries.
US and China will have to chip in. If they do not, Germany should not. Why should Germany bankrupt itself and lose the competitive edge in the world.
Sure Germans will suffer. So will US and China.
It will be about who is left standing at the dawn after the disaster.

PilioVillasJune 26th, 2012 at 6:48 am

To be horribly pedantic, can I suggest the title should be "A Perfect Global Storm"? For comparison: we say "A lovely Chinese gadget," not "A Chinese lovely gadget".

Weekly Round Up June 27 – 2012 | Connect the DotsJune 27th, 2012 at 1:33 am

[...] A Global Perfect Storm - Nouriel Roubini. “Dark, lowering financial and economic clouds are, it seems, rolling in from every direction: the eurozone, the United States, China, and elsewhere. Indeed, the global economy in 2013 could be a very difficult environment in which to find shelter.“ [...]

Renato BuehlerJuly 3rd, 2012 at 5:28 am

In North America it took 200 years, plus a civil war, to establish the mightiest state in the world, the United States of America. What do you expect, Mr. Roubini, so much different in Europe? It will not take a civil war, nor will Greece leave the Euro zone. Europe is too strong and too much interested to fight through all the difficulties in a cooperative way. Europe will not drop Greece, and Greece will not leave Europe. Take a deep breath: The EURO is here to stay. So is Europe and the European Union!
Best wishes from a Swiss, no member of the European Union, Renato Buehler,

Bill SmithJuly 3rd, 2012 at 4:31 pm

Except that "Perfect Storm" is unique term, it is equivalent to "gadget" in your example. So you would say "A lovely Global Perfect Storm"

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