Risks And Challanges

“We have to recognize that Americans are adults. Then we have to speak to them straightforward about the risks and challenges that we have, rather than kicking the can down the road.”

in Bloomberg Radio

This Second Global Slowdown Could Not Have Come At A More Difficult Time

Politically, this second global slowdown could not have come at a more difficult time. In the US, Democrats and Republicans will soon retreat to their corners to prepare for November's mid-term elections. Meanwhile, President Barack Obama must again persuade America's taxpayers that a new surge in government spending is needed to protect a fragile recovery -- and at a moment when voters are telling pollsters that America's debt is as great a threat as terrorism.

in FT.com

The Global Economy Is Heading For A Serious Slowdown This Year

It looks as if the global economy is heading for a serious slowdown this year.

Emergency austerity programmes in some countries will put a drag on growth. Inventory adjustments will run their course. The effects of tax policies that steal demand from the future – such as the US “cash for clunkers” scheme, tax credits for home buyers or cash for green appliances – will fizzle out. Labour market conditions will remain weak. The slow and painful deleveraging of balance sheets and income-challenged households, financial institutions and governments will continue.

The result is governments and consumers that spent too much and now need to deleverage – in the US, Britain, Spain, Greece and elsewhere – will spend, consume and import less. But those governments and consumers that saved too much – in China, emerging Asia, Germany and Japan – are not spending more. In a world of excess supply, the recovery of global aggregate demand will be weak, pushing global growth much lower.

The most realistic scenario for global growth is painful, even if we avoid a double dip. In the US, 1.5 per cent growth in the second half of this year and into 2011 will feel like a recession, given a probable further rise in unemployment, larger budget deficits, a further fall in home prices, larger losses by banks on mortgages and loans, and the risk that a protectionist surge will further damage relations with China.

In the eurozone, growth will be closer to zero by the end of this year, as fiscal austerity and stock market corrections, along with rises in sovereign, corporate and interbank liquidity spreads, take their toll. Increases in volatility and sovereign debt risk will also undermine business and consumer confidence in ways that move beyond Europe.

Those hoping that China can keep the global economy afloat are likely to be disappointed. The world’s leading growth engine in recent years is slowing, from 11 per cent-plus towards a 7 per cent rate by year’s end. That will damage China’s exporters, while spelling bad news for export-growth in the rest of Asia, which increasingly relies on Chinese imports too.

Politically, this second global slowdown could not have come at a more difficult time. In the US, Democrats and Republicans will soon retreat to their corners to prepare for November’s mid-term elections. Meanwhile, President Barack Obama must again persuade America’s taxpayers that a new surge in government spending is needed to protect a fragile recovery – and at a moment when voters are telling pollsters that America’s debt is as great a threat as terrorism.

So the president must also tell voters that the longer-term solution to America’s economic insecurity involves both austerity and sacrifice. But abroad he faces an even larger problem. Mr Obama has limited leverage with the few remaining moderate Republicans, but the recent Group of 20 summit in Toronto showed him even less able to persuade European governments to shrug off fiscal worries. These countries seem unlikely to shift from their view that events of the past year in Greece, Spain and elsewhere – and fears of further crises to come – demand that the continent must learn to live within its means.

Nor should we expect much from the next G20 meeting in Seoul in November. A common fear of global meltdown provided some degree of unity at previous meetings. Yet, there is no longer international consensus on where tomorrow’s true dangers lie. Differing assumptions within the group over the proper role of government in a domestic economy make agreement on the details involving anything of substance very difficult.

Mr Obama’s critics often deride him as a man whose talents are limited to his fine speeches. Yet even if that were true, words matter. Plans to boost government spending in the near term, and to embrace austerity in the longer term, will only become more difficult if the president fails to explain the need for them. For their part, America’s Republicans need to accept that the path to a global recovery begins at home, with extended unemployment insurance and help for state and local governments.

Countries that save too much must also do their part for global demand. In particular, the Chinese leadership should recognise that failure to allow a more substantive revaluation of its currency will have serious consequences at home. It makes little sense to try to boost China’s local exporters while undermining the longer-term health of their best customers. Beijing must also move much more quickly to boost China’s domestic consumption.

The eurozone needs fiscal austerity, but it also needs a level of growth best provided by an easing of monetary policy from the European Central Bank. Early debt-restructuring of insolvent members should also be on the agenda. Germany should postpone its fiscal consolidation for a couple of years to boost disposable income and consumption. Outside Europe, Japan must accelerate economic reforms.

These steps will take time. Even if all are undertaken properly, global growth will recover only slowly. But if they are not undertaken at all, the risk of a global double dip, and a new financial crisis, will grow sharply. Policymakers cannot keep kicking the can down the road for much longer.

in FT.com, by Nouriel Roubini and Ian Bremmer

The Ability To Backstop The Financial System Is Not There

A year ago we had all these policy bullets. We could push down rates to zero, we had quantitative easing, we could do a budget deficit of 10 percent of GDP or backstop the financial system.

Banks at this point are too big to fail, but also too big to be bailed, especially in Europe where the sovereigns are in trouble and therefore the ability to backstop the financial system is not there.

in www.dailymarkets.com

Related stocks: Banco Santander, S.A. (ADR) (Public, NYSE:STD), Banco Bilbao Vizcaya Argentaria SA (ADR) (Public, NYSE:BBVA), Royal Bank of Scotland Group plc (ADR) (Public, NYSE:RBS), Lloyds Banking Group PLC (ADR) (Public, NYSE:LYG), Barclays PLC (ADR) (Public, NYSE:BCS), National Bank of Greece (ADR) (Public, NYSE:NBG), Credit Suisse Group AG (ADR) (Public, NYSE:CS)

Everything Signals A Global Slowdown

"Everything signals a slowdown of the US, a slowdown of Europe, a slowdown of Japan and a slowdown of China"

in CNBC

Banks Are Too Big To Fail, But Also Too Big To Be Bailed

"Banks at this point are too big to fail, but also too big to be bailed, especially in Europe where the sovereigns are in trouble and therefore the ability to backstop the financial system is not there."

in CNBC

German And Canadian Government Bonds Are Safe Haven

Nouriel Roubini, the New York University economist credited with predicting the financial crisis, said that government bonds of countries such as Germany, Canada and the U.S. will represent a haven from increasingly volatile markets in coming months.

in Bloomberg

Zero Growth In Eurozone

"Given the shocks of the last few months, by year-end, euro zone growth could be closer to zero percent"

in CNBC

The Global Economy Will Slow In Coming Months

"Nouriel Roubini, the New York University economist who is credited with predicting the financial crisis, said he expects the global economy to slow in coming months as governments slash budget deficits. U.S. growth will drop to about 1.5 precent by the end of 2010, while the euro area’s expansion may stall, he said at a conference in Aix en Provence, France."

in Business Week

The Economy Is Weakening

I don’t think we are going to have a third depression but the risk of a double dip recession are risign. Even in the US, the growth the second half of the year is going to fall towards one and a half per cent. The economy is weakening.

in Fox Business

CNBC Video Interview: A Double Dip Recession?

Discussing whether the recession is headed for a double-dip, with Nouriel Roubini, Roubini Global Economics chairman.

Greece’s Best Option Is An Orderly Default

It is time to recognise that Greece is not just suffering from a liquidity crisis; it is facing an insolvency crisis too. Rating agencies have started to downgrade its public debt to junk level, while spreads on Greek sovereign bonds last week spiked to new highs. The €110bn bail-out agreed by the European Union and the International Monetary Fund in May only delays the inevitable default and risks making it disorderly when it comes. Instead, an orderly restructuring of Greece’s public debt is needed now.

Nouriel Roubini, FT.com

Book Review: Crisis Economics: A Crash Course in the Future of Finance

"Crisis Economics: A Crash Course in the Future of Finance"
by Nouriel Roubini and Stephen Mihm (2010)

"In 2008 when others saw a liquidity crisis, [Roubini] saw the truth of the matter -- a credit crisis. The book reads very easily and draws one in to this remarkable story that traces and explains step by step the elements of the crisis." - John A. Haslem, professor emeritus of finance

Dr Doom Or Dr Reality?

"I would rather be called a 'Dr Realist', who is neither pessimistic nor optimistic, but someone who wants to be right and tries to figure out the upside of the risk"

in China Daily

China: In The Short Term The Economy Is Overheating

"There is no need to exit the stimulus right away, but you have to think about it and phase it out, because in the short term the economy is overheating."

in People`s Daily Online

The US Budget Deficit Is 11% Of US GDP. Not Very Far From Greece`s 13%.

The US today is having a budget deficit of 0.5 trillion dollars this year, that’s 11 percent of US GDP, that’s not very far from the 13 percent of Greece. And the US is much bigger than Greece.

in Making Sense

The Size Of The Renmimbi Appreciation Will Be Modest

"Even if the Chinese were to allow a gradual renminbi appreciation relative to the U.S. dollar, the size of such appreciation would be modest over the next year, not more than 3 or 4 percent as the trade surplus has shrunk, growth is likely to slow down on China and labor/employment unrest remains of concern to the Chinese."

in Reuters

Chinese Currency Policy

"This is the first significant signal in years of a change in Chinese currency policy."

in Reuters

There`s A Rising Risk Of A Breakup Of The Monetary Union

“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

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