Nouriel Roubini, writing in the New York Daily News , said on Sunday that “unemployed Americans should hunker down for more job losses” given the likelihood of a job less recovery. This was as gloomy a piece as I have seen from Roubini in the past few months. He has clearly become more downbeat about the long-term picture for the U.S. economy.

The article begins:

Think the worst is over? Wrong. Conditions in the U.S. labor markets are awful and worsening. While the official unemployment rate is already 10.2% and another 200,000 jobs were lost in October, when you include discouraged workers and partially employed workers the figure is a whopping 17.5%…

…we can expect that job losses will continue until the end of 2010 at the earliest. In other words, if you are unemployed and looking for work and just waiting for the economy to turn the corner, you had better hunker down. All the economic numbers suggest this will take a while. The jobs just are not coming back.

This sounds dire. As a result, Roubini goes on to call on the Obama Administration to take direct action on jobs. Extending unemployment benefits is not going to cut it.  Roubini says we need:

a bold prescription that increases the fiscal stimulus with another round of labor-intensive, shovel-ready infrastructure projects, helps fiscally strapped state and local governments and provides a temporary tax credit to the private sector to hire more workers. Helping the unemployed just by extending unemployment benefits is necessary not sufficient; it leads to persistent unemployment rather than job creation.

With statistics showing that the rate of long-term joblessness is at the highest since the Great Depression, Roubini joins an increasing number of economists who are calling on the Obama Administration to take the employment situation more seriously.

Paul Krugman has said that we are now in a liquidity trap. Therefore, we need to subsidize jobs and promote work sharing as Germany is doing.

I have made similar arguments about quantitative easing for the past year. Monetary policy is effectively useless – and is merely creating bubbles.

The Obama Administration is moving into deficit hawk mode at the wrong time as this will only worsen the jobs situation and lead to a double dip recession. Instead, I have called for a payroll tax cut or a job subsidy.

Randall Wray, a professor at the University of Missouri-Kansas City, has also offered a unique job solution.

All of this is urgent, as Roubini indicates:

Based on my best judgment, it is most likely that the unemployment rate will peak close to 11% and will remain at a very high level for two years or more.

The weakness in labor markets and the sharp fall in labor income ensure a weak recovery of private consumption and an anemic recovery of the economy, and increases the risk of a double dip recession…

The damage will be extensive and severe unless bold policy action is undertaken now.

The Obama Administration is taking an ‘indirect’ approach. They do so for three reasons. First, they are afraid of being boxed in politically by taking more direct measures. They also see a need to defend their previous policy decisions.  But, Mark Thoma thinks part of the resistance to more direct measures is ideological.  In a post earlier today, he says:

Growth policy is an attempt to make the economy grow faster, and stabilization policy attempts to keep the economy as close as possible to that trend, i.e. to avoid business cycles.

When Republicans had the political microphone, they emphasized growth policy (because it allowed them to argue for what they really wanted, lower taxes, growth policy was simply the vehicle that allowed them to get there), and this was supported by academic work from people such as Robert Lucas who claimed that, from a welfare perspective, stabilization was of second order concern, growth policy was where policymakers should focus their effort if they wanted to enhance welfare. Summers’ remarks reflect this type of thinking.

The Obama Administration’s approach of focusing on deficit reduction without enough direct job measures is sure to keep unemployment elevated. In looking at the politics of economics I said recently:

I see jobs as the first area for Obama to attack. The question is whether he does this directly via some modified private-sector controlled W.P.A.-type program or indirectly via something like a payroll tax cut. After jobs comes foreclosure. Personal income and taxes are the least important area going forward (especially as any tax cuts will either increase deficit spending or have to be made up by tax increases elsewhere).

The Obama Administration is doing the opposite. They seem to have received the ‘deficit reduction comes first takeaway’ from recent state elections in Virginia, New Jersey, and New York instead of the ‘jobs come first takeaway.’ That is bad news for Democrats and it is also bad news for the hopes of a sustained recovery.

Source

The worst is yet to come: Unemployed Americans should hunker down for more job losses – Nouriel Roubini, NY Daily News
Job Losses Mount, Enduring and Deep – Floyd Norris, NY Times (the long-term unemployment image is also from this story)

Related posts:

• Comprehensive unemployment rate is 17.5%
• 467,000 jobs lost in the U.S. in June 2009
• 651,000 jobs lost but unemployment rate at 8.1% in U.S.
• 10.2% unemployment, 190,000 jobs lost
• Unemployment rate to 9.7%, 216,000 jobs lost

Hong Kong’s leader Donald Tsang has come out with a scathing criticism of U.S. monetary policy, comparing it to Japan’s which he believes contributed to 1997’s Asian crisis. This is the most direct and strident criticism of the U.S. Federal reserve’s monetary policy from a major international politician yet.

Bloomberg reports:

The Federal Reserve’s policy of keeping interest rates near zero is fueling a wave of speculative capital that may cause the next global crisis, Hong Kong’s leader said.

“I’m scared and leaders should look out,” said Donald Tsang, chief executive of the city, said in Singapore today. “America is doing exactly what Japan did last time,” he said, adding that Japan’s zero interest rate policy contributed to the 1997 Asian financial crisis and U.S. mortgage meltdown…

“We have a U.S. dollar carry trade at the moment,” Tsang, 65, said in a speech where leaders of the Asia Pacific Economic Cooperation forum are gathering for a weekend summit. The carry trade is where investors borrow cheaply in one currency and use the funds to invest in other currencies.

“Where is the money going — it’s where the problem’s going to be: Asia,” Tsang said. “You can see asset prices going up, not only in Korea, in Taiwan, in Singapore and in Hong Kong, going up to levels that are incompatible or inconsistent with the economic fundamentals.”

Tsang’s criticisms are sure to draw attention as it comes during the APEC summit in Singapore, which is a cross-Pacific economic and political group now being used to show Asian-U.S. cooperation and harmony. Tsang has an especially painful memory of the Asian Crisis as he was Hong Kong’s financial secretary at the time and was forced with the central bank to spend $15 billion to defend Hong Kong’s currency peg as speculative capital fled Asian markets en masse. Depression ensued across wide swathes of Asia, leaving a psychological scar that reverberates today.

As for the comparisons of America to Japan, I find them very well placed.  Yesterday I posted an article in which Marshall Auerback and Fox’s Brian Sullivan discussed parallels between the two. Nouriel Roubini fears that a U.S. dollar carry trade is building which is being used to help inflate assets outside of the U.S. in a global financial bubble.

This is certainly what the Japanese had done in the 1990s. Last August, before the Lehman collapse and panic I wrote that Japan was an enabler of the tech bubble of the late nineties:

the Bank of Japan did not realize the limitations of monetary policy. It could provide easy money, but it could not control where that money ended up. So, ultimately it ended up in the carry trade and helped supply the fuel for the tech bubble.

Was the BOJ responsible for the Tech Bubble? That’s a question that cannot be answered. But, what is true is that the Japanese government and monetary authorities were very instrumental both in the late 1990s and earlier this decade in providing free money to global investors via the carry trade.

Tsang is saying that Japan’s easy money policy also infected Asian markets, helping to inflate an unsustainable bubble which led to collapse and depression. In a macabre repeat of economic history, he sees the same re-occurring now as the U.S. tries desperately to ward off deflation.

Source

Fed May Cause Next Crisis, Hong Kong’s Tsang Suggests – Bloomberg

Related posts:

• Japan’s easy money policy was the trigger for the tech wreck
• Is the U.S. dollar carry trade replacing the one in Japanese yen?
• Depression in Japan
• Asia is de-coupling
• Big Mac Index: Europe overvalued, Asia undervalued

If you have been wondering whether a statistical recovery is at hand, today’s ISM manufacturing report should be the clincher.  The report was definitely bullish with the ISM index rising to 55.7 and sub-components supporting the understanding that the manufacturing sector is expanding. This is quite a contrast to last month’s weak data and demonstrates that last month was a one-month aberration in what should now be seen as a full-blown technical recovery.

I want to talk about this recovery briefly in the context of the signs that came before it, my own forecasting psychology and what the future holds.

The ISM data

The key data points to see as evidence of a fairly broad-based expansion in manufacturing come from new orders, production and inventories.  The production number came in at an incredibly bullish 63.3, marking the fifth consecutive month of increase. New orders slipped slightly, but were also in striking distance of the 60 range. (50 represents the demarcation between expansion and contraction).

But, from my perspective, it is inventories which are the most bullish data points. The inventories data show that inventories in the manufacturing sector were still being purged in October even while production is increasing.  That means that inventories are likely to make a huge contribution to GDP going forward in Q1 and Q2 of 2010. GDP could again surprise to the upside.

My mea culpa on forecast herding

All of this suggests the economy has been growing since the beginning of Summer. In the early Spring, I indicated that jobless claims were peaking (which added to my stock market bullishness at the time). This call turns out to have been accurate. However, at the time, this post produced very negative sentiments, albeit more from readers on Naked Capitalism than Credit Writedowns – in my opinion because most people erroneously extrapolate a current trend into the future (see my reaction to this from a post weeks later, “Through a glass darkly: the economy and confirmation bias in the econoblogosphere”)

Nevertheless, a piece from NBER guru Robert Gordon that I reported demonstrated to me that I was not alone in seeing the trend reversal in jobless claims. Eventually, in May I indicated that the jobless claims data were pointing to an imminent recovery and remarked that the data had usually been fairly accurate in the past.

And for the record, I have said I see a recovery happening probably in Q4 2009 or Q1 2010 (see my post “The Fake Recovery”).

The real question is how robust a recovery are we going to have and this is directly related to why the jobless claims series has been sending a false signal.  Now, initial claims has been sending a recovery signal since January. Yet, continuing claims continued to rise more quickly until last week.  In the past, one had seen these two series as harbingers of imminent recovery.  But, I am talking Q4 here.  Why? Deleveraging.

In the end, consumers are going to be forced to reduce debt and save more in this more cautious financial environment.  Team Obama does seem intent on re-kindling animal spirits but the personal savings rate has gone up nonetheless.  This will be a drag on GDP growth going forward and means that the economy’s rebound will be more tenuous and slower to develop.  In my view, this means recovery will be delayed and once it gets going it will be weak.  The potential for a double dip is very high.

So, to be clear, first derivatives are starting to turn up and since recession is a first derivative event, we are probably going to see an end to this recession soon enough.  But, with structural problems still remaining, the U.S. economy will be weak for a long time to come.

Why do I bring this up?  Because, despite the data pointing to recovery, I decided the start of the recovery process would be delayed until this quarter or Q1 2010 by consumers repairing their balance sheets – and, in retrospect, in part due to a desire to avoid being too far out of step with the consensus.

I must admit to falling prey to forecast herding, something I talked about in June (admittedly without mentioning my own culpability which I should have done). At the time, I said:

No one wants to go out on a limb with a bold call only to see this prediction proved wrong.  If one fails, it is better to fail conventionally.  The necessary corollary of that statement is this: market forecasters and analysts play it safe by making sure their forecasts are not often far from the consensus forecast.  Think of the consensus forecast as an anchor which restricts the outlook of any individual forecaster afraid of failing unconventionally.

In Roubini’s case – and this logic also applies to media darlings like Meredith Whitney – it does NOT pay to up the ante.  What Faber is saying is that they have already benefitted from the bold and unconventional contrarian market call they initially made.  There is little payoff and much risk from continuing on that path.  A bearish analyst who misses the turn gets the stick.  Just ask the original Dr. Doom, Henry Kaufman.

Roubini is not running with the herd

The one thing that makes me think about my error in tweaking my bullishness has to do with Nouriel Roubini. In the quote above, I said he has little incentive to double down on a bearish forecast at this point in time.  Both he and Meredith Whitney, two voices of caution leading into crisis, have been much more upbeat of late. Are they hedging as I did?  Hard to say.

But, with Nouriel Roubini’s recent FT Op-Ed, this is over. Roubini decried the easy money policy he believes is leading to a dollar carry trade and an increase of risk appetite across a wide variety of asset classes. He believes this experiment will not end well. I share his view.

Roubini, in going public in this way, is officially departing from a more hedged nuanced position he has been using over the last few months as the recovery has taken hold. Yves Smith says:

Nouriel Roubini has officially left the “hedging your bets on the economy” camp.

I applaud him for coming out with this piece and suggest you read it because it may come to be seen as the make or break call in determining his reputation as economic soothsayer.

Recovery is happening, but watch asset prices

For my part, I will look to avoid a repeat of the ‘jobless claims incident.’ Hopefully, I have done by writing my depression post at the beginning of last month, which outlines my view that we are in a cyclical recovery in the middle of a longer-term depression.

I would like to make some amendments to my thinking at the time though. First and foremost, I have come to doubt whether we are seeing a balance sheet recession right now. One reason I am writing this post is because the ISM manufacturing data turned up in May at precisely the same time that the credit revulsion-induced savings rate turned down. Translation: there is no balance sheet recession in the U.S., at least not yet. (see my post “Americans are not increasing savings”). This means the recovery could surprise to the upside. Moreover, the ISM data point to potential upside surprises from inventories, leading to an even more robust outlook.

What I believe is happening has much to do with Nouriel Roubini’s comments. U.S. economic policy is geared toward reproducing the status quo ante via reflation of asset prices (something Bill Gross thinks is the right policy and even Dilbert has made fun of). The policy has been wildly successful so far, with asset prices bubbling over globally. I have called this the fake recovery, but as recently as September I was on the fence about how much uptick we were to get. I never dreamed the recovery process could be so robust given the headwinds we faced.

However, reflation has also given investors a license to take risk. Look at the return of John Meriwether as a telltale sign.  Reflation policies are inflating assets far and wide: European high yield, American high yield, Swedish house prices, London house prices, Chinese property prices, and inducing reckless lending. The list is endless. Even Bill Gross’ piece pointed to inflated prices, a view shared by Jeremy Grantham.

The long and short is we are seeing another asset bubble inflating courtesy of easy money. While Morgan Stanley worries easy money will lead to inflation, former Morgan Stanley economist Andy Xie fears this will end in a double dip. To make matters worse, there is a dollar carry trade now spreading a liquidity seeking return dynamic abroad. This is the additional risk of which Roubini writes, believing it could precipitate another crunch or crash. Ironically, a strong recovery is not necessarily bullish.

Is a double dip or crash a baseline scenario? No, not necessarily – but it is increasingly likely. So, as bullish as I believe the data are, I am more worried about a bad outcome, not less.

Related posts:

• ISM shows manufacturing sector close to recovery
• Both initial claims and continuing claims now pointing to recovery
• Jobless claims may signal the end is near
• ISM: September manufacturing data disappoint; market sells off
• Morgan Stanley: Recession will ‘end by mid-to-late summer’

Nouriel Roubini seems to think so. In remarks quoted via Bloomberg, he called the enormous increase in asset prices “the mother of all carry trades.”

Investors worldwide are borrowing dollars to buy assets including equities and commodities, fueling “huge” bubbles that may spark another financial crisis, said New York University professor Nouriel Roubini.

“We have the mother of all carry trades,” Roubini, who predicted the banking crisis that spurred more than $1.6 trillion of asset writedowns and credit losses at financial companies worldwide since 2007, said via satellite to a conference in Cape Town, South Africa. “Everybody’s playing the same game and this game is becoming dangerous.”

If you recall, this is the same trade the world’s punters were putting on via the Japanese yen when the Japanese were pumping out huge amounts of liquidity earlier in this decade.  The yen’s real effective exchange rate only hit post Plaza Accord trade-weighted lows in 2007 when the carry trade was all the rage and just when all hell was breaking loose in subprime.

Reuters said then:

The yen’s real trade-weighted value slipped in October as the Federal Reserve’s interest rate cuts gave a boost to global stock markets and prompted investors to sell the Japanese currency in carry trades.

Bank of Japan data on Friday showed its index of the yen’s real effective exchange rate fell 1.9 percent in October to 96.7 JPYEEXR=J.

The retreat in the BOJ’s REER index took it closer to a 22-year low of 92.8 hit in both June and July, when the currency was sliding as carry trades flourished.

That was the weakest since the September 1985 Plaza Accord in which the five biggest industrialised countries agreed to depreciate the dollar against the German mark and the yen via intervention, aiming to correct the giant U.S. trade deficit at the time.

For the year the yen’s real value has lost 3.6 percent despite periodic bouts of strength as the credit market crunch this year and worries about the U.S. economy prompted market players to unwind risky carry trades.

The yen has suffered in the past few years from carry trades in which investors use the low-yielding Japanese currency as a cheap source of funds to buy higher-yielding currencies or rising assets, such as stocks or commodities.

My view has been that the Japanese yen carry trade was a major contributor to asset bubbles globally as the Bank of Japan’s excess liquidity found its way to other asset markets via the carry trade.  Last August, in my post “Japan’s easy money policy was the trigger for the tech wreck” I also pointed to the yen carry trade as a major factor in the Internet bubble. And I certainly see it as a major factor in this decade’s housing bubbles.

Now the U.S. dollar is the carry trade currency of choice, with zero percent interest rates funding asset purchases globally. This play is certainly pumping up all manner of asset prices. But as with the yen carry trade before it, I do not see this ending well.

Roubini takes a similar tack:

The risk is that we are planting the seeds of the next financial crisis,” said Roubini, chairman of New York-based research and advisory service Roubini Global Economics. “This asset bubble is totally inconsistent with a weaker recovery of economic and financial fundamentals.

Source

Roubini Says Carry Trades Fueling ‘Huge’ Asset Bubble – Bloomberg

Related posts:

• China slams U.S. for inflating global asset prices via carry trade
• U.S. Bailout: the mother of all carry trades?
• Hong Kong: “America is doing exactly what Japan did last time”
• Japan’s easy money policy was the trigger for the tech wreck
• Chart of the day: Aussie – Yen cross

I just read a CNBC story which fails to mention CNBC’s involvement in the apparently erroneous report that Nouriel Roubini has suddenly become more bullish. Is this omission justified? 

The controversy centers on statements Roubini made regarding the timing of a technical recovery in the United States.  Yesterday, it was reported on CNBC and elsewhere that Roubini had made a ‘change’ to his market view and was essentially more bullish on the U.S. economy.  Many market participants believe this was a major factor in the rise in shares yesterday.

However, Roubini issued a statement after markets closed repudiating the view that he had changed his view on the U.S. economy at all (see statement here).  And since that time, many in the financial blogosphere have taken CNBC in particular to task for its role in spreading the belief that Roubini’s economic outlook was more favorable.

• CNBC Report on Roubini; Denninger Response – Barry Ritholtz
• CNBC: You Owe America An Apology – Karl Denninger
• Roubini: "My Views Were Taken Out Of Context." – Zero Hedge
• Denninger accuses CNBC of falsely goosing market on Roubini’s back – Credit Writedowns
• Roubini Denies He Said "Recession Will Be Over This Year," Despite Bullish Media Reports Otherwise – Yves Smith

Clearly, this story struck a nerve in the blogosphere.  Now, CNBC has acknowledged the original thesis that Roubini is a bull was false. But, the media outlet apparently does not see itself as culpable for their part in this.  Below is part of a story they ran on their website.  Notice the parts I have highlighted in bold.

Several business news outlets, picking up on a report initially from Reuters, earlier Thursday cited Roubini as saying that the worst of the economic financial crisis may be over.

The New York University professor was quoted by Reuters as saying that the economy would emerge from the recession toward the end of 2009.

Reports of his comments helped trigger a late rally in the stock market.

Roubini added late Thursday that he sees no economic growth before the end of 2009.

So, I guess Reuters is to blame?  I see this exchange on CNBC in the video below as part and parcel of this story.

You tell me: Is it Reuters or CNBC here?

Note: Reuters has now amended its story to reflect the new non-bullish story line. The original story is nowhere on the web.

Sources

RPT-UPDATE 2-Worst behind us but more stimulus needed-Roubini – Reuters

Roubini: Views on Economy Unchanged Despite Reports – CNBC

Related posts:

• Denninger accuses CNBC of falsely goosing market on Roubini’s back
• Richard Bernstein: Once a huge market bear, now a bull
• Nouriel Roubini: we are in recession
• Meredith Whitney: “I haven’t been this bearish in a year”
• Marc Faber: “I am 100% sure that the U.S. will go into hyperinflation”

Here is a video released by Karl Denninger of Market Ticker in which he shows exasperation with CNBC’s pro-bullish bias.  He notes that CNBC used comments by Nouriel Roubini to suggest the economy is rebounding faster. Denninger sees this as a pattern at CNBC and brings up prior incidents of a similar nature.

For his part, Roubini was also distressed about this and has released a statement on his site that is in this morning’s links refuting the characterization of his comments given on CNBC.

The market had rallied on the back of the CNBC story.

Hat tip Barry Ritholtz.

Related posts:

• CNBC denies culpability in Roubini as bull saga
• Jon Stewart’s indictment of CNBC
• Warren Buffett: we have to be sure all debt liabilities of Citigroup are met
• CNBC gives primer on counterparty credit default swap risk
• Jim Cramer on CNBC: Any mention of Jon Stewart?

This is yet another semi-positive post about the Geithner plan. To reiterate, I think the plan is inadequate because it assumes illiquidity instead of insolvency and is a huge gift to the financial sector. But, that does not mean it will definitely not work in conjunction with other moves by Obama.

In fact, to the degree the Obama Administration has Plan B up its sleeve, bankruptcy/pre-privatization is still an option here (Remember, they did speak to the Swedes recently about their 1990s resolution).

Nouriel Roubini agrees with this assessment as quoted by the New York Times.

Mr. Roubini believes that the Treasury’s plan does not preclude nationalization at all. Rather, he said, it will help to clear the way to full government takeover of some troubled institutions.

“I see the option of nationalization” and the one presented by the Obama administration “as being complementary,” Mr. Roubini said. He believes that the stress tests the government plans on conducting on the banks will reveal which are solvent and which are insolvent.

In his view, those banks that are deemed insolvent will not participate in the toxic-asset plan and will be taken over by the government. Banks deemed solvent will be the ones that get to participate.

Nationalization “is fully on the table for banks that are insolvent,” Mr. Roubini said.

Do I like the plan? No. I don’t even like the way the stress tests will be conducted. Is the plan fair to ordinary Americans? No.

Will it work? I have my doubts, but it could do. But, then again, there is always Plan B later.

Source
Dr. Doom Finds Promise in Obama’s Toxic-Asset Plan – NY Times

Related posts:

• America needs a pre-privatization plan
• Are Citi and BofA gaming the Geithner Plan already?
• The Obama-Geithner Plan will fail
• Nouriel Roubini: Bloomberg Interview on Banking Crisis Plan
• GMAC has been nationalized

Bloomberg has a good interview from the World Economic Forum at Davos with Professors Nouriel Roubini and Robert Shiller on the credit crisis and banking industry. Both men have been quite sober in their analysis of the bubble and its likely consequences.  The video is below with a few good comments from the likes of George Soros and Stephen Roach as well.

Enjoy.

Related posts:

• Nouriel Roubini: Bloomberg Interview on Banking Crisis Plan
• On BBC World Service talking autos at 2PM Eastern
• Nouriel Roubini: we are in recession
• TED spread signals better conditions
• CNBC denies culpability in Roubini as bull saga

I am certainly of the view that a considerable worsening of the recession is baked in the cake for 2009. But will fiscal and monetary stimulus prevent worst case scenarios? I certainly hope so, as I have laid out in recent posts.

But, don’t take my word for it. The RGE Monitor headed by Nouriel Roubini, the omni-present Professor of Finance at New York University, weighs in on this with a recent post. Below is the first snippet of that post where they lays out their argument.

Central banks around the world have undertaken a number of measures to forestall deflation and lift the global economy out of economic slump and credit crisis.  Aside from traditional monetary policy tools such as official interest rate cuts and relaxations in reserve requirements, central banks have resorted to alternative unconventional tools.  Quantitative easing has begun in the epicenters of the credit crisis, U.S. and Europe, who may be joined by other central banks as they too head towards zero interest rates in leaps and bounds (Sweden moved the most in the developed world by 175bp in one shot).  With monetary policy transmission broken by the unwillingness of the private sector to lend or borrow, central banks have had to scurry for alternatives to rate cutting in order to restore markets.  They set up an alphabet soup of liquidity facilities that lend funds or purchase assets, offered guarantees on deposits and loans, and established currency swap lines, in addition to a host of fiscal stimulus packages announced by governments.  Check out “Policy Responses to the Global Credit Crisis”

So are the pieces now in place to prevent global stag-deflation?  It is too soon to tell.  So far, money market and commercial paper markets have shown tentative signs of easing.  But elsewhere in the private sector credit market, tensions remain as asset prices move shambolically and deleveraging drags on among households, banks and businesses.  Though money supply has grown, the velocity of money has slowed despite the flood of liquidity from central banks and official interest rates effectively at or near zero.  In other words, we have fallen into a liquidity trap.  Such a blow to consumer demand makes deflation in 2009 a real possibility.

So, it seems stag-deflation should still be a concern. But stimulus certainly may help. The post goes into much greater detail and I have provided a link below. Roubini’s RGE Monitor is a good site for economic information. So, I suggest you register for it and read the rest of the post.

Source
Will Aggressive Monetary and Fiscal Measures Prevent Stag-deflation in 2009? – RGE Monitor

Related posts:

• Roubini: How to avoid the horrors of ‘stag-deflation’
• Quantitative easing: printing money like mad to ward off deflation
• The inflation – deflation debate redux
• The inflation-deflation debate
• Hayek: “I am not only against inflation but I am also against deflation.”

Below are a few excerpts from an Op-Ed by Nouriel Roubini from today’s Financial Times.

The U.S. and the global economy are at risk of a severe stag-deflation, a deadly combination of economic stagnation/recession and deflation.

A severe global recession will lead to deflationary pressures. Falling demand will lead to lower inflation as companies cut prices to reduce excess inventory. Slack in labour markets from rising unemployment will control labour costs and wage growth. Further slack in commodity markets as prices fall will lead to sharply lower inflation. Thus inflation in advanced economies will fall towards the 1 per cent level that leads to concerns about deflation.

Deflation is dangerous as it leads to a liquidity trap, a deflation trap and a debt deflation trap: nominal policy rates cannot fall below zero and thus monetary policy becomes ineffective. We are already in this liquidity trap since the Fed funds target rate is still 1 per cent but the effective one is close to zero as the Federal Reserve has flooded the financial system with liquidity…

As traditional monetary policy becomes ineffective, other unorthodox policies have be used: massive provision of liquidity to financial institutions to unclog the liquidity crunch and reduce the spread between short-term market rates and policy rates; quasi-fiscal policies to bail out investors, lenders and borrowers…

In the next few months, the flow of macroeconomic and earnings news will be much worse than expected. The credit crunch will get worse, with de­leveraging continuing as hedge funds and other leveraged players are forced to sell assets into illiquid and distressed markets, leading to further cascading falls in prices, other insolvent financial institutions going bust and a few emerging market economies entering a full-blown financial crisis.

The worst is not behind us: 2009 will be a painful year of a global recession, deflation and bankruptcies. Only very aggressive and co-ordinated policy actions will ensure the global economy recovers in 2010 rather than facing protracted stagnation and deflation.

Roubini’s assessment is spot on. Policy-makers would be well advised to heed his prescriptions. However, Germany, for one, thinks it can do without the advised stimulus — fiscal and monetary. Let’s see how they get on in the coming months.

Read the full article below

How to avoid the horrors of ‘stag-deflation’ – FT

Related posts:

• Nouriel Roubini: Will massive stimulus ward off stag-deflation?
• Liquidity trap of a different sort
• The inflation-deflation debate
• The Fed is on the easy money trip
• Nouriel Roubini: we are in recession

“Bloomberg on the Economy” recently spoke to Nouriel Roubini, the oft-quoted NYU finance professor. He believes the U.S. is now in recession and that a global slowdown is in the offing. There are several other countries in recession or poised for recession. I suggest you listen to the

podcast

ROUBINI: We are in a recession in the United States. And a year ago I said that the combination of the biggest housing bust in the last 50 years, the current credit crunch, and how low prices are going to lead to recession.

I believe we’re already in a recession in the United States, and now there are significant signs of slowdown, if not contraction, in a number of other countries. One, inflation is rising throughout the world. We are in a situation of stagflation lite.

KEENE: When we’re in that and we can see that and we report on it every day, say in Europe that’s confronting oil where it is or other nations, let’s go to these emerging markets. Is the scope and scale of China slowing down? Is it single digit where they go from 11 percent to 10 or to 9, or could it be a larger slowdown?

ROUBINI: I imagine it could be a larger slowdown because right now what’s happening is that the U.S. is in a recession, Japan sure enough is going to be in a recession, a good third of Europe is going to be in a recession, U.K., Spain, Italy, Ireland, Portugal. Canada is in a recession, New Zealand is in a recession. Some of these European countries already contracting.

So, we’ve many major economies that are slowing down. And therefore, the trade links and the financial links that China and India and the other emerging markets cannot decouple from this U.S. and global economic slowdown.

It’s going to take time. Right now inflation, with pressures because of overheating of this country is still the most important factor. But they’re now facing even the other side of the problem from inflation rising, but downside risk to economic growth throughout emerging markets. So that’s the worst of all worlds.

Economist Roubini Says U.S. in Recession (Transcript), Bloomberg News 27 Jun 2008

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