Nouriel Roubini is worried about the global economy. While that's nothing new for the man often referred to as Dr. Doom, what's maybe different this time is that, in addition to detailing the problems, he's packing a slew of solutions.
With Daniel Alpert of Westwood Capital and Cornell Law Professor Robert Hockett, Roubini has co-authored a new report entitled The Way Forward: Moving From the Post-Bubble, Post-Bust Economy to Renewed Growth and Competitiveness.
Wednesday night in New York City, the three spoke before a small gathering organized by The New America Foundation, which commissioned the report. Before discussing the trio's policy recommendations, Roubini laid out the 8 reasons why he's still so worried about the global economy (or is it "still" so worried?).
Here's a summation, which itself can be summed up as: There are several negative trends that could devolve into a "vicious cycle," pulling the global economy into another deep recession, or even something worse:
1) Tail Risks: In recent days, Wall Street has seemingly become optimistic Europe is on its way to solving its sovereign debt/banking crisis, but Roubini is dubious. "They have a plan to have a plan," he scoffs of the latest news from the Continent. (See: European Debt Crisis Reaches "the End of the Beginning": Martin Wolf )
The situation in Europe is "extremely troubling" and after attempting to "extend and pretend," policymakers now "have no luxury of waiting," he says. EU officials have weeks (not months) to develop and implement a plan that is "credible and front-loaded," Roubini says. Failure to do so could result in bank failures, sovereign defaults or even a "disorderly disintegration" of the EU, any of which could turn the potential for a "mild recession" into a global crisis "as severe as Lehman if not worse."
(Roubini also warned of the risk of a "hard-landing" in China but says that is probably a 2013 or 2014 story.)
2) Risk Aversion: Given the myriad global uncertainties, businesses see "there is value to wait," meaning less capital expenditures and less hiring. This dynamic can become "self-fulfilling" and lead to a "crisis of confidence," Roubini says.
3) Negative Feedbacks: Recent improvements in financial markets notwithstanding, Roubini worries about the "vicious cycle" of market volatility leading to poor economic activity leading to more market volatility, and so on and so on.
4) Joblessness in America: Last week's better-than-expected jobs report brought hope to some observers, but not Roubini, who notes U6, a.k.a. the "real" unemployment rate, rose to 16.5%, the highest level of the year. The risk, Roubini says, is the "cyclical" problem of joblessness "can become permanent" for those out of work for an extended period, and the ranks of the long-term unemployed rose to 6.24 million in September, or 44.6% of the total unemployed.
5) Reckoning Postponed: Thanks to over $1 trillion in public sector outlays, via taxes and transfers, the deleveraging process at the consumer level has been "postponed," Roubini says. But it cannot be avoided and the U.S. savings rate will start to rise again, which is good for individuals but bad for the economy in what Keynes dubbed "the paradox of thrift"
6) Sitting on Cash: While many optimists tout the strength of corporate balance sheets, Roubini notes corporations are not spending their cash because final demand is so weak. Similar to worry number two, corporations' desire to keep costs down — in order to remain competitive and meet Wall Street earnings targets — is "a vicious cycle, a Catch 22," he says, noting lower labor costs for employers means less income for workers.
7) Rising Income Inequality: "Forget the morality" of America's rising wealth gap, Roubini says; it's bad for the economy because of the negative effect on aggregate demand.
8) Empty Chamber: Policymakers are "running out of bullets," Roubini says, describing the Fed's quantitative easing as "impotent," at least in its ability to spur real economic growth. Meanwhile, European governments can't afford to bail out their banks and efforts by the world's leading economic powers to devalue their respective currencies is a "zero sum game," he says. "Currency tensions could lead to trade wars," which often lead to hot wars.
3 Keys to Recovery
But, as noted above, the NYU professor isn't just about identifying problems, he's also trying to make a "contribution to the policy debate" by offering solutions as well.
"The Way Forward" rests on three pillars:
- A "substantial" (read: over $1 trillion) program to rebuild America's infrastructure over the next 5-to-7 years, which will create jobs now and lay the foundation for "a more efficient and cost-effective national economy," the report states. ("It doesn't take a genius" to know America needs to spend on infrastructure, Roubini quipped last night. Still, this will require approval from Congress, which seems pretty short on geniuses these days.)
- A national "debt—restructuring program" designed to "unclog the real estate and financial arteries," and featuring principal reductions and/or bridge-loan assistance for homeowners with a proven ability to continue making payments.
- Global reforms to restore the balance of trade, as well as the balance of supply and demand. To that end, the paper calls for "the establishment of an emergency global demand-stabilization fund to recycle foreign exchange reserves now held by surplus nations," most notably China. Because any such fund would most likely be administered by the IMF or World Bank, this is likely to prove highly controversial.
"Our present crisis is more formidable even than would be a debt-deflation alone," the paper declares, suggesting the problem has been "inadequate action" by policymakers to date, spurred by an "inadequate understanding of what ails us."
Stay tuned for additional coverage of the report, which can be found here.
- Nouriel Roubini