Dr Doom Predicts

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‘DR. DOOM’: THE GLOBAL ECONOMIC STORM I PREDICTED IS ON ITS WAY
Posted on July 9, 2012 at 3:59pm by  Becket Adams
Nouriel Roubini, the economist whose dire warnings earned him the nickname “Dr. Doom,” said on Monday that the recent slowdowns in the U.S., Europe, and
China is proof that the global “perfect storm” scenario he predicted is on its way.
“(The) 2013 perfect storm scenario I wrote on months ago is unfolding,” Roubini Tweeted on Monday.
And he may be right.
You see, Roubini predicted that the four specific elements would come together to create the perfect global economic crisis: a stalled U.S. economy, the EU
debt crisis, a slowdown in emerging markets (China), and conflict in Iran.
“Chinese inflation data released on Monday, suggested that the economy is cooling faster than expected, while employment data out of the U.S. on Friday
indicated that jobs growth was tepid for a fourth straight month in June,” CNBC’s Ansuya Harjani reports.
“Dr. Doom” also believes that the storm, when it hits, will be far worse than the financial crisis of 2008 because policymakers have run “out of rabbits to pull out
of the hat.”
Again, he may be 100 percent correct.
Considering that last week the European Central Bank, the Bank of England, and the People’s Bank of China all announced major policy changes that had no
effect whatsoever on the markets, policymakers may have indeed run out of tricks to stem the oncoming “storm.”
Watch Roubini explain why the storm may be far worse than 2008 [via Bloomberg]:
“Levitational force of policy easing can only temporarily lift asset prices as gravitational forces of weaker fundamentals dominate over time,” Roubini said.
Bill Smead, CEO of Smead Capital Management, agrees that there is little central banks can do to halt a the global slowdown, CNBC reports.

“Last week, he told CNBC that there is ‘virtually zero chance’ that pump-priming by central banks will succeed,” Harjani  writes, “suggesting that policymakers
should instead let the economic bust work itself through the system.”.

Mr Roubini"torm Scenario

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A Global Perfect Storm

15 June 2012

NEW YORK – 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.