“There’s a rising risk of breakup of the monetary union, and the ECB will have to play an important role to prevent that from happening”
in Bloomberg.com
Jun 17, 2010
Policymakers Are Damned If They Do And Damned If They Don`t
There is an ongoing debate among global policymakers about when and how fast to exit from the strong monetary and fiscal stimulus that prevented the Great Recession of 2008-2009 from turning into a new Great Depression. Germany and the European Central Bank are pushing aggressively for early fiscal austerity; the United States is worried about the risks of excessively early fiscal consolidation.
In fact, policymakers are damned if they do and damned if they don't. If they take away the monetary and fiscal stimulus too soon - when private demand remains shaky - there is a risk of falling back into recession and deflation. While fiscal austerity may be necessary in countries with large deficits and debt, raising taxes and cutting government spending may make the recession and deflation worse.
On the other hand, if policymakers maintain the stimulus for too long, runaway fiscal deficits may lead to a sovereign debt crisis (markets are already punishing fiscally undisciplined countries with larger sovereign spreads). Or, if these deficits are monetised, high inflation may force up long-term interest rates and choke off economic recovery.
The problem is compounded by the fact that, for the last decade, the US and other deficit countries - including the United Kingdom, Spain, Greece, Portugal, Ireland, Iceland, Dubai, and Australia - have been consumers of first and last resort, spending more than their income and running current-account deficits. Meanwhile, emerging Asian economies - particularly China - together with Japan, Germany, and a few other countries have been the producers of first and last resort, spending less than their income and running current-account surpluses.
Overspending countries are now retrenching, owing to the need to reduce their private and public spending, to import less, and to reduce their external deficits and deleverage. But if the deficit countries spend less while the surplus countries don't compensate by savings less and spending more - especially on private and public consumption - then excess productive capacity will meet a lack of aggregate demand, leading to another slump in global economic growth.
in TodayOnline
In fact, policymakers are damned if they do and damned if they don't. If they take away the monetary and fiscal stimulus too soon - when private demand remains shaky - there is a risk of falling back into recession and deflation. While fiscal austerity may be necessary in countries with large deficits and debt, raising taxes and cutting government spending may make the recession and deflation worse.
On the other hand, if policymakers maintain the stimulus for too long, runaway fiscal deficits may lead to a sovereign debt crisis (markets are already punishing fiscally undisciplined countries with larger sovereign spreads). Or, if these deficits are monetised, high inflation may force up long-term interest rates and choke off economic recovery.
The problem is compounded by the fact that, for the last decade, the US and other deficit countries - including the United Kingdom, Spain, Greece, Portugal, Ireland, Iceland, Dubai, and Australia - have been consumers of first and last resort, spending more than their income and running current-account deficits. Meanwhile, emerging Asian economies - particularly China - together with Japan, Germany, and a few other countries have been the producers of first and last resort, spending less than their income and running current-account surpluses.
Overspending countries are now retrenching, owing to the need to reduce their private and public spending, to import less, and to reduce their external deficits and deleverage. But if the deficit countries spend less while the surplus countries don't compensate by savings less and spending more - especially on private and public consumption - then excess productive capacity will meet a lack of aggregate demand, leading to another slump in global economic growth.
in TodayOnline
Jun 16, 2010
How To Avoid A Double Dip Recession
First, in countries where early fiscal austerity is necessary to prevent a fiscal crisis, monetary policy should be much easier – via lower policy rates and more quantitative easing – to compensate for the recessionary and deflationary effects of fiscal tightening. In general, near-zero policy rates should be maintained in most advanced economies to support the economic recovery.
Second, countries where bond-market vigilantes have not yet awakened – the US, the UK, and Japan – should maintain their fiscal stimulus while designing credible fiscal consolidation plans to be implemented later over the medium term.
Third, over-saving countries like China and emerging Asia, Germany, and Japan should implement policies that reduce their savings and current-account surpluses. Specifically, China and emerging Asia should implement reforms that reduce the need for precautionary savings and let their currencies appreciate; Germany should maintain its fiscal stimulus and extend it into 2011, rather than starting its ill-conceived fiscal austerity now; and Japan should pursue measures to reduce its current-account surplus and stimulate real incomes and consumption.
Fourth, countries with current-account surpluses should let their undervalued currencies appreciate, while the ECB should follow an easier monetary policy that accommodates a gradual further weakening of the euro to restore competiveness and growth in the eurozone.
Fifth, in countries where private-sector deleveraging is very rapid via a fall in private consumption and private investment, the fiscal stimulus should be maintained and extended, as long as financial markets do not perceive those deficits as unsustainable.
Sixth, while regulatory reform that increases the liquidity and capital ratios for financial institutions is necessary, those higher ratios should be phased in gradually to prevent a further worsening of the credit crunch.
Seventh, in countries where private and public debt levels are unsustainable – household debt in countries where the housing boom has gone bust and debts of governments, like Greece’s, that suffer from insolvency rather just illiquidity – should be restructured and reduced to prevent a severe debt deflation and contraction of spending.
Finally, the International Monetary Fund, the European Union, and other multilateral institutions should provide generous lender-of-last-resort support in order to prevent a severe deflationary recession in countries that need private and public deleveraging.
In general, deleveraging by households, governments, and financial institutions should be gradual – and supported by currency weakening – if we are to avoid a double-dip recession and a worsening of deflation. Countries that can still afford fiscal stimulus and need to reduce their savings and increase spending should contribute to the global current-account adjustment – via currency adjustments and expenditure increases – in order to prevent a global shortage of aggregate demand.
Failure to implement such coordinated policy measures – to sustain global aggregate demand at a time when deflationary trends are still severe in advanced economies – could lead to a very dangerous and damaging double-dip recession in advanced economies. Such an outcome would cause another bout of severe systemic risk in global financial markets, trigger a series of contagious sovereign defaults, and severely damage the growth prospects of emerging-market economies that have so far experienced a more robust recovery than advanced countries.
in Benzinga.com
Second, countries where bond-market vigilantes have not yet awakened – the US, the UK, and Japan – should maintain their fiscal stimulus while designing credible fiscal consolidation plans to be implemented later over the medium term.
Third, over-saving countries like China and emerging Asia, Germany, and Japan should implement policies that reduce their savings and current-account surpluses. Specifically, China and emerging Asia should implement reforms that reduce the need for precautionary savings and let their currencies appreciate; Germany should maintain its fiscal stimulus and extend it into 2011, rather than starting its ill-conceived fiscal austerity now; and Japan should pursue measures to reduce its current-account surplus and stimulate real incomes and consumption.
Fourth, countries with current-account surpluses should let their undervalued currencies appreciate, while the ECB should follow an easier monetary policy that accommodates a gradual further weakening of the euro to restore competiveness and growth in the eurozone.
Fifth, in countries where private-sector deleveraging is very rapid via a fall in private consumption and private investment, the fiscal stimulus should be maintained and extended, as long as financial markets do not perceive those deficits as unsustainable.
Sixth, while regulatory reform that increases the liquidity and capital ratios for financial institutions is necessary, those higher ratios should be phased in gradually to prevent a further worsening of the credit crunch.
Seventh, in countries where private and public debt levels are unsustainable – household debt in countries where the housing boom has gone bust and debts of governments, like Greece’s, that suffer from insolvency rather just illiquidity – should be restructured and reduced to prevent a severe debt deflation and contraction of spending.
Finally, the International Monetary Fund, the European Union, and other multilateral institutions should provide generous lender-of-last-resort support in order to prevent a severe deflationary recession in countries that need private and public deleveraging.
In general, deleveraging by households, governments, and financial institutions should be gradual – and supported by currency weakening – if we are to avoid a double-dip recession and a worsening of deflation. Countries that can still afford fiscal stimulus and need to reduce their savings and increase spending should contribute to the global current-account adjustment – via currency adjustments and expenditure increases – in order to prevent a global shortage of aggregate demand.
Failure to implement such coordinated policy measures – to sustain global aggregate demand at a time when deflationary trends are still severe in advanced economies – could lead to a very dangerous and damaging double-dip recession in advanced economies. Such an outcome would cause another bout of severe systemic risk in global financial markets, trigger a series of contagious sovereign defaults, and severely damage the growth prospects of emerging-market economies that have so far experienced a more robust recovery than advanced countries.
in Benzinga.com
US Will Avoid A Double Dip
In an interview to CNBC-TV18, Roubini said that the United States is going to avoid a double dip recession. However he warned that in the second half of the year the growth is likely to be below 2%. With a negative outlook for the second half, he said the US economy may be hit by high unemployment rate, fall of housing markets in terms of prices and large budget deficits.
in CNBC India
in CNBC India
Jun 15, 2010
The ECB Should Move Rates To Zero
“That has to be the policy mix: tight fiscal, but much more easy money, looser monetary policy, more quantitative easing and also a weakening of the euro. Going to zero alone is not going to be enough, it’s 100 basis points. They need to go to zero, they need to do more quantitative easing, they need to support dysfunctional markets, they need to signal that they are actually not uncomfortable with a weaker euro as long as that is a gradual and orderly process.”
in Bloomberg
in Bloomberg
Risks Of A Double Dip In The Euro Zone
"I would say that the risk of a double-dip recession is highest in the euro zone… I would say there is a more than 50 percent probability, if not of a technical double-dip then of economic stagnation in the area"
in CNBC
in CNBC
Jun 6, 2010
Hungary: Government Is Preparing New Fiscal Austerity
“The new government is preparing the public for new fiscal austerity. Hungarian policymakers exacerbated the country’s fiscal situation. The new government came to power and tried to blame the past government."
in Bloomberg
in Bloomberg
Jun 4, 2010
Restructuring The Public Debt Of Greece
“What we need to do to avoid having massive losses for the financial system is an orderly restructuring of the public debt of Greece. Stabilizing your public debt-to-GDP ratio at 145 percent is not stability. Calling it stability is a bit of a joke.
The value of the euro has to fall significantly lower, certainly towards parity if not below, to help prevent a breakup of the monetary union. So far the ECB is not recognizing this problem, but they will have to recognize it and do something about it. Otherwise the liquidity crunch is going to get only worse."
Zermatt Summit in Switzerland
The value of the euro has to fall significantly lower, certainly towards parity if not below, to help prevent a breakup of the monetary union. So far the ECB is not recognizing this problem, but they will have to recognize it and do something about it. Otherwise the liquidity crunch is going to get only worse."
Zermatt Summit in Switzerland
May 31, 2010
There Is Evidence Of Overheating In Emerging Economies
“In Brazil, like in many other emerging market economies, there is now evidence of overheating of the economy. Expected and actual inflation is starting to rise, and that implies that over the next few quarters there has to be a tightening of monetary policy, gradually but progressively, in order to make sure that inflation expectations remain anchored."
in Business Week
in Business Week
May 30, 2010
Brazil And India Are Better Then China
Brazil and India are in a better shape than China regarding the strength of domestic demand. Emerging markets can grow between 5 percent and 8 percent during the global economic recovery compared to between 2 percent and 3 percent for rich nations.
in Bloomberg
in Bloomberg
May 21, 2010
Bond Vigilantes Are Going To Wake Up In The United States
"Bond market vigilantes have already woken up in Greece, in Spain, in Portugal, in Ireland, in Iceland, and soon enough they could wake up in the U.K., in Japan, in the United States, if we keep on running very large fiscal deficits. The chances are, they are going to wake up in the United States in the next three years and say, this is unsustainable."
in Bloomberg News
in Bloomberg News
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