Monday, November 24, 2014

A Global Perfect Storm

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.

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    1. CommentedLuke Ho-Hyung Lee

      It’s the job-killing machines in the market. Without first replacing these job-killing machines, no matter how powerful and aggressive economic policies or stimulus plans are adopted, they will not be effective. Rather, they bring the likelihood of causing greater ill effects. Please see: “Job-Killing Machines in the Modern Information Age...”

    2. Commenteddonna jorgo

      hello PROF
      i have much intristing about your analysis in global crisis eco-polit
      i read and my mind go to EUZ more specifice to Merkel she have one long objective to make federal europ question is after communist system go down many country USSR ..REP.FEDER YUGOSLLAVE.CHECOSLAVACIA ALL THIS ARE SAPERATE...SO WHY? (i know ) ..
      to have federalisme in EUROPe for the time we are is unaccepteble ..GER have to do one thing CHANGE the politice ..if not will be first go out because she can not (kalipty)all the moneytary problem for EUZ ..and with printe .... without investiment she will go so deep in inflation .. .and will need other way ..after to fix this problem 1929...
      thank you

    3. CommentedRoman Bleifer

      It's too late to talk about the threat of a new wave of crisis in the future date. It has already started, but did not have time to gain traction. But probably in the fall to pick up this power. This scenario was very predictable and was predicted as the most likely in the last year.( )
      The author listed the problems of the world economy. And though this list is long known to all, even though it can still add, it is enough for that to make conclusions from it. The crisis is not only a global (which is quite natural in the context of globalization), but it also has a systemic nature. It covers all areas of the world economy. Determination of the global financial crisis as a crisis, it is deeply misleading. To deal with the crisis have been used all the known methods of financing. This gave only a reprieve, but did not solve the problems facing the economy. The problems only worsened the crisis spreading to new areas and new economy.
      It makes no sense to encourage emerging economies to structural reforms, while structural reforms will not happen in the world's leading economies. And without major structural reforms, they will cease to be leading.

    4. Commentedavraam dectis


      The euro zone crisis could be over next week to the complete satisfaction of all parties involved. Nobody needs to cede soverignty or implement any fiscal unions.

      All that is needed is a new mechanism that would have the same effect as interstate aid has in the USA.

      So the question is what mechanism would provide the same effect as a bailout yet work within the eurozone constraints.

      Since these are different countries, this mechanism would have to treat all citizens equally. The only mechanism that meets that constraint is Central Bank Dividends.

      A Central Bank Dividend is a stimulus mechanism that compensates the owner of an asset, which in this case, is citizenship.

      If a 20,000 euro dividend were assigned to each euro area citizen, the bailout would be instantaneous and noninflationary.

      Citizens of countries in financial distress would not receive the money. It would be set aside to pay off bonds as they came due. This would instantaneously take the pressure off those countries, since their borrowing costs would drop and their debt service would temporarily approach zero. It would not be inflationary since the money would slowly enter the economies of depressed countries.

      Countries not in debt could give the money to their citizens if they so chose, possible over a period of time to deal with inflation concerns.

      Some will call this monetizing, and it is. But it gets the job done and is noninflationary. It will be a one time event to give the euro area time to restructure.

      Central Bank Dividends are also a much more fair method of stimulus than tax cuts. Tax cuts mostly put money into the hands of the wealthy while CBD treats all citizens on an equal basis.

      If there is a eurozone smashup, the only reason will be a lack of originality amongst the decision makers.


    5. CommentedMark Pitts

      You can't have monetary union without fiscal union, and as Mr. Booth notes, you can't have fiscal union without political union. Germany recognizes this reality. The Latin countries do not.

        CommentedAndrew Purdy

        Germany should exit the EuroZone and allow the Euro to devalue and become a Drachma. To be sure, the Germans will have to bear some costs of exit, but on the benefit side, Germany's external debt would still be denominated in Euros and would be inflated away.

    6. CommentedBrenda Jones

      It would seem that we are headed for that global perfect storm, but if it can't be averted, then what next? It should be obvious to everyone that the world we live in today is interconnected and interdependent, which means that as much as we might not like it, we somehow have to get along. It's either that or a third World War, which could be an outcome of that perfect storm. Unless, we learn to get along. (So our relationships go, so the economies go.)

      Here's the catch, though: Getting along means that what is good for you is good for me, and what is bad for you is bad for me—on a global scale. This is ultimate integration, as in one big global family that cares for each other.

      Our salvation lies in harmony with the law of nature, the law of homeostasis or interconnection of all parts to serve the greater whole, as cells in a body serve to benefit the whole body. Though such good relations on all levels of society, we can build a new model of connection that brings balance, peace, and prosperity to all.

    7. CommentedAndrew Purdy

      I expect Germany to be the first to exit the Eurozone. That will free the remaining members to print Euros to infinity and beyond. The Euro will be devalued by at least 50%, and this will solve the debt problem.

    8. CommentedZsolt Hermann

      The article describes the present situation accurately although as one of the comments suggests we could add some more worrisome points to the picture.
      It is also interesting to see what the comments are saying, although most of them acknowledge the crisis situation, there still seems some hope that through some "miracle", or the cyclical nature of crisis situations we will simply pull through.
      What is against this optimism is that we are not in a usual cyclical crisis situation repeating itself through our history, but we are in a situation we never faced before, thus we have no historical precedent or experience about it.
      We evolved into a closed, global world where each and every individual or nation is dependent on the other, and we are so interconnected that a seemingly small random event at one part of the globe affects the whole network immediately, we can see daily proof of it through the crisis.
      I agree that it is not all gloom and doom, and we are not necessarily entering a catastrophic scenario, but in order to solve our problems we have to leave our present system, thinking and attitude, because all our methods, experience, tricks and cheats are based on our previous, "loose" system, also we calculated our lifestyle on infinite quantitative growth without restrictions of resources, possibility of expansion all which turned out to be false and illusory.
      As Einstein suggested in order to solve the problem we have to leave the framework within which we created the problem, we have to study our new system, its conditions, and based on our examinations we have to create a totally new human system.
      Simply blaming individuals, groups of people, nations, regions, or waiting for cyclical revival or some miracle growth will not help us but will make our future attempts much more difficult.

        CommentedBrenda Jones

        Agree with a lot you said. Blaming could lead to war. Wouldn't we all much prefer some thinking out-of-the-box, to build a new system where instead of exploiting each other, we learn to live in harmony?

    9. CommentedGary Marshall

      Hello Nouriel,

      Here is a solution to the Greek problem. If anyone can find the flaw, I shall be more than happy to give him or her $50,000. I am just tired of doing this. Its not the end of the world, but a new beginning.


      The costs of borrowing for a nation to fund public expenditures, if it borrows solely from its resident citizens and in the nation's currency, is nil.

      Why? Because if, in adding a financial debt to a community, one adds an equivalent financial asset, the aggregate finances of the community will not in any way be altered. This is simple reasoning confirmed by
      simple arithmetic.

      The community is the source of the government's funds. The government taxes the community to pay for public services provided by the government.

      Cost of public services is $10 million.

      Scenario 1: The government taxes $10 million.

      Community finances: minus $10 million from community bank accounts for government expenditures.
      No community government debt, no community
      government IOU.

      Scenario 2: The government borrows $10 million from solely community lenders at a certain interest rate.

      Community finances: minus $10 million from community bank accounts for government expenditures.
      Community government debt: $10 million;
      Community government bond: $10 million.

      At x years in the future: the asset held by the community (lenders) will be $10 million + y interest. The deferred liability claimed against the community (taxpayers) will be $10 million + y interest.

      The value of all community government debts when combined with all community government IOUs or bonds is zero for the community. It is the same $0 combined worth whether the community pays its taxes immediately or never pays them at all.

      So if a community borrows from its own citizens to fund worthy public expenditures rather than taxes those citizens, it will not alter the aggregate finances of the community or the wealth of the community any
      more than taxation would have. Adding a financial debt and an equivalent financial asset to a community will cause the elimination of both when summed.

      Whatever financial benefit taxation possesses is nullified by the fact that borrowing instead of taxation places no greater financial burden on the community.

      However, the costs of Taxation are immense. By ridding the nation of Taxation and instituting borrowing to fund public expenditures, the nation will shed all those costs of Taxation for the negligible fee of borrowing in the financial markets and the administration of public

      Gary Marshall

    10. CommentedPaul A. Myers

      Excellent delineation of the many stress points and lines of fracture in the global world. But I also think that the modern world has many interconnections and shock absorbers and these have not been given sufficient weight by Roubini. That means a most likely course of muddling through probably has a good chance of success.

      Overall, in Europe there is a backlog of losses that has to be distributed and probably will be. Like in the US, this will probably take longer than it should. The politics in both the US and Europe over the next decade is going to be about who eats these losses through reduced standards of living delivered through lower pensions and other public benefits. And what will be the rewards to those who want to do the work that will be the basis for future growth.

      So, I would say a time of reckoning, not a time of catastrophe.

    11. CommentedSimeon Iliev

      Sadly, no mention of peak oil, overpopulation, loss of biodiversity, global warming, pollution, Islamic fundamentalism, Russian mafia state, immense US war budgets, drug money and organized crime. Nor of the current or possible future synergies between all those problems + many others.
      The economy (or 'markets') is NOT exactly the most serious issue here.

    12. Commenteddonna jorgo

      Professor ROUBINI is right not pessimisem but is real situation and we are to thank'you Roubini because is the only one economist-political looket with righte way and trying to explante with article he write. I think we have to see more seriosly ..P Roubini don't WRite for poor people who don't have to lose nothing but for busineses and al the economic financiar in world ..SO THANK YOU
      PS crisis is not out from the door but inside ...

    13. Commentedsrinivasan gopalan

      In troubled times like this Cassandras of doom and gloom abound. No doubt, Roubini's pessimism is grounded on realities and what we see supervening elsewhere. But history is replete with instances where crises had always been converted into opening new vistas for viable solutions. As poet laureate William Hazel let wisely put it on what basis when we see nothing but improvement behind us are we to expect nothing but disaster before us? Euro crisis is not the only crisis plaguing the world today as crisis is part of existence so long as people exist in the planet. What is required is a statesmanlike vision by political leaders and heightened cooperation to see that no country or continent is left to fend for itself when the chips are down. It is time that the use of technology which united us should also be leveraged to find coordinated and concerted action on the part of countries with surplus to go in for the rescue of countries with deficit. What is required is faith in the essential goodness of people and trust in every one so that a durable way could be found from the current mess that unfortunately plagues not one continent or a country but almost the whole of the world in one form or another.

    14. CommentedProcyon Mukherjee

      I can hardly try to summarize an entire treatise, ‘This time is different’, by Reinhart & Rogof, in a few sentences, but that is what I intend to do to explain some of the thoughts described by Roubini.

      This seminal paper by the authors, have gone through a number of periods of default over the last few centuries which was preceded by extended periods of lull and the commonality is striking:
      1.Each lull had been followed by a new wave of default

      2.Serial default or external debt- that is repeated sovereign debt default- is the norm throughout every region in the world, including Asia and Europe

      3.Global economic factors, commodity prices and interest rates together with high mobility of capital have influenced debt factors

      4.Domestic debt and long term maturity & its timing has been one of the significant contributing factors in servicing of the government debt obligation at certain periods of time leading to default conditions.

      Roubini’s prescription for Germany for agreeing to a eurozone wide deposit insurance with a debt mutualization program leaves one with a sobering thought that the German banking system with a leverage in the stratosphere whose final backstop is with the German government would be enormously stressed if this is enacted. On the contrary the German banks have systematically reduced their exposure in the Spanish, Greek and Portuguese financial entities in the last couple of years. We are talking two different things, which do not look feasible.

      Procyon Mukherjee

    15. Commentedjames durante

      Topsy turvy. Let's look on the bright side: a collapse in the economy ay be just what is needed to place the focus where it belongs, on adjusting our lives to the reality of ciate change. No civilization has proven sustainable. This one has outlasted the others because of the discovery of carbon energy reserves. Those same energy resources have created for more extensive and complex social and economic relations and a global ecological crisis. The momentum from the former has tended to obscure the latter. "If we can just keep this train running down the track, with more people on it and at higher speed, we won't really have to worry about that cliff up ahead."

      It stands to reason that the train crashing is preferable to the train going over the cliff. Severe economic crisis might allow us to individually and collectively evaluate what is really important: more leisure time, more family time, more time for ceremonies, a focus on repairing and restoring damaged ecosystems might all supplant the frenzied materialism and harried work lives that so many people still experience today as "reality."

    16. CommentedMichael Booth

      Roubini and many others gloss over the political union that must precede or at least accompany the fiscal and banking union. In this essay, Rouobini does not even mention it. But that is the tradeoff Germany is really demanding and properly so.

      This concession of sovereignty has never been Germany's problem, but has always been France's. The French and others what the money, but refuse all oversight and will tolerate no sovereignty loss to Brussels, nor to any other pan-EU authority.

      Therein lies the true barrier to the resolution of the mess: not German refusal to enter financial unions of one sort or another, but French (and Spanish and Italian etc) refusal to give up sovereignty in exchange.

      Without this quid pro quo the Germans are completely correct in refusing all that Rooubini suggests.

        Commentedjimmy rousseau

        I don't know why all the commenters talking about the need for political union assume the germans want this and other countries not. There is no way germans would accept a true federal president with real powers coming maybe from spain or italy or even france. It seems to be a common assumption that a democratically elected president of a strong european federation will be from a germanic state. The problem with the EU is that no country is ready to give up sovereignty to the union, germany included.

    17. CommentedWilliam Wallace

      As a small business owner in Spain, I watched as the bad news last Spring led to poor summer revenues in 2011. This year, with even more dire news, business among locals and tourists alike is strangely up. Good news for me, but I cannot help but wonder if consumers aren't "going Nero" and partying a bit while contemplating he economic conflagration. Strange times.