Neither Of The Two Biggest Players In The Euro Zone Is Pursuing Policies Consistent With Restoring Sustained Growth In The Euro Zone’s Periphery

In the periphery of the eurozone, the problem is the opposite: bond vigilantes are demanding that Greece, Ireland, Portugal, Spain, and Italy front-load fiscal consolidation or watch their borrowing costs go through the roof, risking them their market access and triggering a public-debt crisis. Markets don’t care that front-loaded fiscal consolidation is exacerbating recession and thus making the goal of reducing debt and deficits as a share of GDP near-impossible to achieve.

To avoid a persistent and destructive recession, the fiscal and structural reforms imposed by the bond vigilantes should be accompanied by other euro-zone policies that restore growth and prevent vicious debt dynamics. The European Central Bank should ease monetary policy in order to weaken the value of the euro and bootstrap the periphery’s growth. And Germany should cut taxes temporarily – rather than raising taxes, as planned – in order to increase disposable income and stimulate German demand for the periphery’s goods and services.

Alas, neither of the two biggest players in the euro zone is pursuing policies consistent with restoring sustained growth in the euro zone’s periphery. The ECB’s monetary policy is too tight; and Germany is front-loading fiscal austerity. Thus, the periphery is destined to a destructive deflationary and recessionary adjustment that will exacerbate the risks of recession, insolvency, eventual defaults and, possibly, exit from the euro.

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In The US We Have The Worst Of All Possible Worlds

In the US, we have the worst of all possible worlds. On one hand, stimulus had become a dirty word – even within the Obama administration – well before the Republicans’ mid-term election victory ruled out another round altogether. On the other hand, medium-term consolidation will be all but impossible in America’s current atmosphere of hyper-partisanship, with Republicans blocking any tax increase and Democrats resisting reforms of entitlement spending. Nor is there any pressure from bond markets to concentrate the minds of policymakers.

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In Most Advanced Economies, Deficits Need To Be Reduced To Avoid A Fiscal Train Wreck Down The Line

"The fiscal stimulus that most advanced economies and emerging markets implemented during the 2008-2009 global recession – together with monetary easing and the backstopping of the financial system – prevented the Great Recession from turning into another Great Depression in 2010. At a time when every component of private demand was collapsing, the boost from higher government spending and lower taxes stopped the global economy’s free-fall and created the basis for recovery.

Unfortunately, stimulus spending and the related bailout of the financial system, together with the recession’s effect on revenues, contributed to fiscal deficits on the order of 10% of GDP in most advanced economies. According to the International Monetary Fund and others, these economies’ ratio of public debt to GDP will surpass 110% by 2015, compared to 70% before the crisis. Aging populations in most advanced economies imply additional public debt in the long term, owing to non-fully-funded pension schemes and rising health-care costs.

Thus, in most advanced economies, deficits need to be reduced to avoid a fiscal train wreck down the line. But much research, including a recent study by the IMF, suggests that raising taxes and reducing government spending has a negative short-term effect on aggregate demand, thereby reinforcing deflationary and recessionary trends – and undermining fiscal consolidation." - in Project Syndicate

La Tribune: "How Roubini Sees 2011"

"How Roubini sees 2011," leads La Tribune, featuring an interview with the illustrious American economist who predicted the subprime crisis. Nouriel Roubini forecasts that the new year will be marked by slower growth in industrialised countries, mounting inflation in emerging countries and, above all, greater monetary instability, which could prompt “the weakest members to leave the eurozone”. The economist stresses the need to persist in carrying through the “painful but necessary” austerity plans and reforms to cope with the sovereign debt problem, whether in Greece, Ireland, Spain or Portugal (the so-called "PIGS").

It's Pretty Clear The Housing Market Has Already Double Dipped

"It's pretty clear the housing market has already double dipped. And the rate of decline is stronger than in previous months. If you look at the data, Case Shiller has been falling every month since the tax credit expired in May. Everyone who wanted to buy a home did so by April." - in CNBC

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Spain Is Too Big To Fail And Too Big To Be Bailed Out.

“Spain is too big to fail but also too big to be bailed out. The existing resources for bailouts are too small to backstop the Spanish banks and the sovereign if there is going to be a run on them.”

in Bloomberg TV

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United Kingdom`s Risks To Growth.

"UK fiscal austerity is more front loaded than back loaded with short term risks to growth if rising inflation doesnt allow the BoE to do QE2"

in Twitter

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We May Need QE3, But Congress May Not Allow It

“We may need QE3, but then the politics from Congress and the internal dynamic of the FOMC may not allow it, even if now growth is still below trend and inflation is still low and falling.”

in Bloomberg

Economic Growth In The US And Most Developed Economies Is Anaemic And Below Expectations.

"Economic growth in the US and most developed economies is anaemic and below expectations. Measures of inflation, both core and headline, are below the implicit and explicit targets of the Federal Reserve. The scenario is low growth, low inflation and an unemployment rate close to 10 per cent. If one were to run the numbers, you get that the Fed Funds rate (FFR) should be around minus 5 percent, but nominal policy rates have a zero lower bound. Quantitative easing (QE) by the US and other governments has been increasing liquidity to effectively push the real policy rate below zero. Some $600bn of additional liquidity in QE2 is the equivalent of a reduction of about 50-60 basis points in the FFR. When Ben Bernanke says this is just a variant of traditional monetary policy, I think that is correct, even if unconventional.

I think recent opposition to QE2, especially those that have said it is a disaster, is totally wrong. Given the high risk of a double dip recession, ask yourself where would the economy and risky asset prices be today if this had not been done. Asset price reaction had already priced in QE2 from Bernanke’s speech in Jackson Hole well ahead of the actual implementation. The stock market is about 10 per cent higher." - in RGE

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European Sovereign Debt Crisis

“The risk of something disorderly happening is still significant. At the moment, the policy is still lend, pray and hope this is a liquidity problem and not a solvency problem.”

in The Telegraph

The Risks For A Double Dip Recession Have Receded.

"The good news about advanced economies is that the tail-risk of a double-dip recession has receded."

Outlook for 2011, Roubini Global Economics in Greenwich Village, New York

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The US Dollar As A Reserve Currency. For How Long?

"Traditionally, empires that hold the global reserve currency are also net foreign creditors and net lenders. The British Empire declined—and the pound lost its status as the main global reserve currency—when Britain became a net debtor and a net borrower in World War II. Today, the United States is in a similar position. It is running huge budget and trade deficits, and is relying on the kindness of restless foreign creditors who are starting to feel uneasy about accumulating even more dollar assets."

in The Times

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Euro Crisis: ECB May Be Forced To Bail Out PIIGS Through Repo And Bond Purchases.

"If no fiscal union, no Euro-Bonds & not a larger EFSF the European Central Bank will be forced to bailout PIIGS banks/sovereigns through its repo & bond purchases."

in Twitter

Q&A With Foreign Policy Magazine

Reading list: This Time Is Different, by Carmen Reinhart and Kenneth Rogoff; Fault Lines, by Raghuram Rajan; Regulating Wall Street, by Viral Acharya et al.

Best idea: The continued rise of emerging-market economies.
Worst idea: The forecast of a V-shaped recovery for the U.S. economy.
China or India? India, in the long term.
Kindle or iPad? iPad.

Foreign Policy Magazine On Roubini

"Being a global economic Cassandra isn’t a cheerful job, but someone’s got to do it — and Nouriel Roubini acknowledges that he fits the role perfectly. He has even embraced the moniker “Dr. Doom,” a name derisively pinned on him before the 2008 crash that showed his pessimism was warranted. And so while everyone’s still trying to figure out how to overcome the last financial crisis, Roubini has his sights set firmly on the next one — which, Dr. Doom assures us in his book, Crisis Economics, won’t latest be too far off.

Roubini argues that the United States is at serious risk of heading back into a recession, and unlike other talking heads, he puts a number on his prediction, saying there’s a 40 percent chance of the United States hitting the dreaded “double dip.” Why? He thinks the root causes of the current malaise have only been covered over and that unhealthy levels of debt are once again piling up around the world — though this time on government accounting ledgers. It’s only a matter of time, he says, until we start seeing national bankruptcies — perhaps even a cascade of them across Europe that sparks the dissolution of the euro. If Roubini has one message, it’s that crises aren’t unforeseeable “black swan” events, but “white swans” — the culmination of long trends that are perfectly intelligible to anyone who takes the time to examine the data. We may not like Dr. Doom’s advice, but we can’t say he didn’t warn us."

in Foreign Policy

Are Bond Vigilantes Starting To Wake Up?

"Obama-GOP tax deal costs $900 billion over two years. US kicking the can further down the road. Are bond vigilantes starting to wake up?"

in Twitter

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Roubini Fears the Bond Vigilantes May Come to U.S. (CNBC)

"Economist Nouriel Roubini on Wednesday voiced concern over a compromise on extending tax cuts struck by US President Barack Obama and Republican leaders, saying the agreement could expose the US to bond vigilantes who will drive up bond yields."

in CNBC

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