After the Storm
The Straits of America
Nouriel Roubini
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NEW YORK – Macroeconomic indicators for the United States have been better than expected for the last few months. Job creation has picked up. Indicators for manufacturing and services have improved moderately. Even the housing industry has shown some signs of life. And consumption growth has been relatively resilient.
But, despite the favorable data, US economic growth will remain weak and below trend throughout 2012. Why is all the recent economic good news not to be believed?
First, US consumers remain income-challenged, wealth-challenged, and debt-constrained. Disposable income has been growing modestly – despite real-wage stagnation – mostly as a result of tax cuts and transfer payments. This is not sustainable: eventually, transfer payments will have to be reduced and taxes raised to reduce the fiscal deficit. Recent consumption data are already weakening relative to a couple of months ago, marked by holiday retail sales that were merely passable.
At the same time, US job growth is still too mediocre to make a dent in the overall unemployment rate and on labor income. The US needs to create at least 150,000 jobs per month on a consistent basis just to stabilize the unemployment rate. More than 40% of the unemployed are now long-term unemployed, which reduces their chances of ever regaining a decent job. Indeed, firms are still trying to find ways to slash labor costs.
Rising income inequality will also constrain consumption growth, as income shares shift from those with a higher marginal propensity to spend (workers and the less wealthy) to those with a higher marginal propensity to save (corporate firms and wealthy households).
Moreover, the recent bounce in investment spending (and housing) will end, with bleak prospects for 2012, as tax benefits expire, firms wait out so-called “tail risks” (low-probability, high-impact events), and insufficient final demand holds down capacity-utilization rates. And most capital spending will continue to be devoted to labor-saving technologies, again implying limited job creation.
At the same time, even after six years of a housing recession, the sector is comatose. With demand for new homes having fallen by 80% relative to the peak, the downward price adjustment is likely to continue in 2012 as the supply of new and existing homes continues to exceed demand. Up to 40% of households with a mortgage – 20 million – could end up with negative equity in their homes. Thus, the vicious cycle of foreclosures and lower prices is likely to continue – and, with so many households severely credit-constrained, consumer confidence, while improving, will remain weak.
Given anemic growth in domestic demand, America’s only chance to move closer to its potential growth rate would be to reduce its large trade deficit. But net exports will be a drag on growth in 2012, for several reasons:
· The dollar would have to weaken further, which is unlikely, because many other central banks have followed the Federal Reserve in additional “quantitative easing,” with the euro likely to remain under downward pressure and China and other emerging-market countries still aggressively intervening to prevent their currencies from rising too fast.
· Slower growth in many advanced economies, China, and other emerging markets will mean lower demand for US exports.
· Oil prices are likely to remain elevated, given geopolitical risks in the Middle East, keeping the US energy-import bill high.
It is unlikely that US policy will come to the rescue. On the contrary, there will be a significant fiscal drag in 2012, and political gridlock in the run-up to the presidential election in November will prevent the authorities from addressing long-term fiscal issues.
Given the bearish outlook for US economic growth, the Fed can be expected to engage in another round of quantitative easing. But the Fed also faces political constraints, and will do too little, and move too late, to help the economy significantly. Moreover, a vocal minority on the Fed’s rate-setting Federal Open Market Committee is against further easing. In any case, monetary policy can address only liquidity problems – and banks are flush with excess reserves.
Most importantly, the US – and many other advanced economies – remains in the early stages of a deleveraging cycle. A recession caused by too much debt and leverage (first in the private sector, and then on public balance sheets) will require a long period of spending less and saving more. This year will be no different, as public-sector deleveraging has barely started.
Finally, there are those tail risks that make investors, corporations, and consumers hyper-cautious: the eurozone, where debt restructurings – or worse, breakup – are risks of systemic consequence; the outcome of the US presidential election; geo-political risks such as the Arab Spring, military confrontation with Iran, instability in Afghanistan and Pakistan, North Korea’s succession, and the leadership transition in China; and the consequences of a global economic slowdown.
Given all of these large and small risks, businesses, consumers, and investors have a strong incentive to wait and do little. The problem, of course, is that when enough people wait and don’t act, they heighten the very risks that they are trying to avoid.
Nouriel Roubini is chairman of Roubini Global Economics (www.roubini.com) and Professor at the Stern School of Business, NYU.
Copyright: Project Syndicate, 2012.
www.project-syndicate.org
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GDP 09:19 12 Jan 12
....had we only....in the panic of Sept.'08....paid EVERY first-mortgage in America,with approximately the same borrowing that we've done anyway, (with nothing to show for it)....the result would've been:....massively less unemployment, foreclosures a rarity, the pirates would've been allowed to fall, and, yes we would owe, as a country, ourselves those monies, but, we, the middle class would be STRONG, demanding consumer goods...instead, like lemmings, we were run off the cliffs of 'The Great Scheming'... A pox on you morons that pose as guardians of this republic...
dhjdhj 02:58 13 Jan 12
While I cannot disagree with most of what you say, it seems to me that your statement at the end:
"The problem, of course, is that when enough people wait and don’t act, they heighten the very risks that they are trying to avoid."
is not helping at all. No different from the comment "Your money is safe at the bank as long as you believe your money is safe at the bank"
Doesn't your article therefore help to prolong the problem?
Factified 08:06 13 Jan 12
What amazes me is there is no real plan to do anything about this or what got us into this mess. Examples:
1) A $650 billion goods trade deficit, about 10-15 million jobs overseas making what Americans consume, about half our unemployment problem.
2) Trajectory to add $10 trillion to the debt over the next decade if current policies continue, $3 trillion if current laws are allowed to take effect (e.g., the Bush/Obama tax cuts expire, AMT affects more people, Medicare reimbursement to doctors is reduced, etc.) There is no plan to balance the budget...ever.
3) No serious reform to the banking industry or mortgage markets. Where is the 20% down payment on first homes, 40% on second homes? How about breaking up the largest banks and splitting investment and depository banking? What about the rating agencies, who are still paid by those they rate and are essentially self-regulated?
4) Career politicians, without term limits or public financing of campaigns.
5) Revolving doors between regulators and industry.
6) An out-of-control military complex, at 5% GDP vs. 3% GDP the last time we balanced the budget.
One would think a President would be actively working on these issues, but I don't see anything meaningful.
The U.S. is in dire need of a third party and real leadership.
pshakkottai 05:22 14 Jan 12
The truth is: Governments are not constrained by the amount of money they collect to spend. For sovereign money governments which create money, the debt problem is a red herring. For example, if a person owes a mortgage of $350,000 on an annual income of $70,000 should he worry about his debt to income ratio = 5 yr ?The US debt to GDP is near 1 yr (100%).
Income taxes play a minor role in macroeconomics. It has a role in income inequality and inflation control.
Govt "debt" is the same as private wealth. FACT! Two key equations in economics which apply to any system of govt:
a) Federal Deficits – Net Imports = Net Private Savings.
b) Gross Domestic Product = Federal Spending + Private Investment + Private Consumption + Net exports.
All banks create money every time a loan is made. This is the fractional reserve (uncontrolled at the moment) banking. California is in the austerity mode because it does not have monetary sovereignty, does not have a state bank and can spend only what it collects if federal govt enforces austerity on it.
USA has no problem creating more dollars and solving the problem except for the dysfunctional congress and their economic ignorance and incessant "debt hysteria" a la Glen Beck and Fox News and mainstream media. The GDP is equal to approximately 5 times govt spending. Actual data is in
http://pshakkottai.wordpress.com/2011/10/16/us-gdp-vs-govt-spending-2
with no taxation involved.
Is something wrong with this? I never hear of equations and sector balances except for the MMT bloggers.
gamesmith94134 09:20 14 Jan 12
Gamesmith94134: global finance’s Supply-chain Revolution
“Open feedback mechanisms ensure a supply chain’s ability to respond to a changing environment, but, in the case of financial supply chains, feedback mechanisms can amplify shocks until the whole system blows up.” It was because there is no firewall available during the crisis, and the pipeline was open with few operators in the financial control like Mr. Sheng said, also, there is even fewer currencies like Euro-dollar only was available in most transactions, even though the public funds like sovereignty debts were being privatized in the open trade, and it create the explosion by volume in sum of money was credited. Firewalls I took off the technical terminology means there is no safety transitory zone established physically, that our financial system allowed the flow in the supply chain freely as the computerized transaction allowed, and there is less time available for reexamination on lack of control, source of origin, birth of credits.
Especially, when the parties took the international reserves for granted that Fed and ECB cut it interest rates to its minimal for the non-inflationary measure that many would consider money are free if they can beat the time. Generally, the 22 players turned the international financial market into their casino. When their governments were the ones who called to upbeat its economies from the recession after the expansion of the debts hitting it fiscal ceiling, and the slow down cut their productivity in near recession. At the same time, the rigid exchange rate went lopsided that created the tension between the debtor and creditor. It exploded.
At present, the financial system must evolve itself with firewalls that stop contagion of the collateral damage over the money with no backing, and shrink the pool of cash for credit lending. Some might call it deleverage of the past 20 years mishaps, or change of climate in our global financial that the supply-chain must stop and check itself; besides, most of us would know by now that money supply and productivity are not on the same parallel at certain point under the influence of inflation an deflation. Without the assurance of the balance payment or imbalance of its exchange rates, the supply-chain will reverse itself.
Perhaps, I like it better if the sovereignty debt and private investment should not be classified as same in enjoying the low interest rate, that sovereignty debt should be handled separately by the Central Banks and World Bank if it does affect the exchange rate when evaluated by IMF for it answer to lack of control.
Transfer Unions must be established to void unsafe transaction and the Trans-continental Zoning to confirm the source of the origin on all transactions when the transaction is registered to enter its zones, or cut hot cashes that undervaluing ones currency from another that influences the international currency exchange rate. Besides, I see the floating rate system is a joke if it put sovereignty in defensive; and it should go with its yardstick like performance that values at each quarters.
Finally, international banks are “too big to fall” should became a legend only, and they must be downsized that international is not licensed to evade sovereignty. There are more of reforms available in regional account and obey to safety net where it allows. Perhaps, if the banker can purchase these sovereignty bonds and metro bonds from the central bank like FED or ECB instead of chasing the wild goose in the open market; the general public can have some credits available for doing business.
If someone question on the equities dealing among the banks, why only the politicians who talk over the policy on financial and there is no financial police system to oversight the banking as a whole. I think the United Nations Security Council can build a better division on financial security than G7 or G20, and it is inclusive for the globalized finance and my past experience tells me so. Evolve or not, we may stand by and watch the outcome of our present crisis and it not over yet till everyone would feel safe from hegemony through these firewalls. If some suggest cooperation from community in forgiving ones’ debt, it would be worse than my New Year project in losing weight every year, and I have been laughing at myself all my life. Without firewall in safeguard one’s wealth, each would isolate itself from contagion for a long, long time.
May the Buddha bless you?
gamesmith94134 09:57 14 Jan 12
Gamesmith94134; The strait of America
1. Rome, CNN----Italian island of Giglio on Friday night, local emergency officials said Saturday.
Rescue teams worked through the night to evacuate more than 4,000 people from the Costa Concordia, owned by Genoa-based Costa Cruises, after it ran aground off of Italy's western coast.
2. European Central Bank policymaker Joerg Asmussen warned that Europe's drive to tighten fiscal rules was being softened, considering the latest draft of the agreement a "substantial watering down" of budgetary discipline because it would allow extra spending in extraordinary circumstances, the Financial Times Deutschland reported.
3. "In the United States, investment and private consumption were the main drivers of growth. Private consumption was the main driver of overall growth in both France and Germany, with the contributions rebounding strongly from the negatives recorded in the previous quarter," the OECD said.
Do they sound like the missiles exploded in the Strait of America? I would agree every bit of you arguments on the propensity to spend or save; the unemployment and even the doing something is better than none. However, I would like you to understand my word in isolation that quantitative easing is not the best solution, flush the banks with their 1% loan to buy debts; and there is no relief on the dollar or Euro, even at 1.26 to a dollar? How do the foreigners can invest in America or Europe under these circumstances, and who dare to cross the Strait of America?
Easy come, Easy go is not a best attitude especially when we need them most?
May the Buddha bless you?
gamesmith94134 06:02 08 Feb 12
Gamesmith94134: Seizing Sustainable Development
In seizing the sustainable development, we must have a foundation of value and equity we can depend on. As a strategist on financial, I see the coming year prior 2015, the southern hemisphere is great destiny on the long and short term goal. Since the European Union is in turmoil and uncertainty with indecisiveness to return to its sovereignty rule, and ECB is taking a paternal rule on the political and financial system over the European developed nations; I see the dyke is not holding and must pay its prices politically and socially that its populace would not continue to owe more debts without consequences. Recent financial pipeline is flowing to “The South” after the emerging market nations withdrew their funds from the European Market and reinvested in the African Nations and South America. This trend will last till 2015 or till the ECB or FED would reconsider to alter the 1% short-term and 1.9% over the ten year longer-term bonds. I can see more of the emerging market nations are shifting their investment to The South to develop light industries and cooperate to secure the native resources from agribusiness to mining. Now, all it need is the system to ensure the fruitful result afterward, and technical transfer to these regions can give equity and value to the land and its people, and restore the political system in a sound and solid state to protect the investment and stop corruption.
It seems that it is your post on the African Union now, Mr. Zuma, to hold the African nations responsible in making it works. Since the developed nations are not humble by their childish play with their Euros and dollars, it is your moment to stand up and be counted, and I doubt if the BRIC can ignore the strength of the Johannesburg and Dubai in handling the Foreign or Currencies Exchanges if the present status quo in developing nations is not sustainable.
In my estimate 7% growth in the present investment in Africa may not be foolproof, but the success rate is much depended on its labels, ‘made in Africa’ or ‘imported from Africa’. In addition, sovereignty is another significant point to its power structure and union; then, it would demand a lot of efforts of the African nations to sort themselves out to sustain unity and cooperation to fill out the shortage of food and resources order to the world in 2020. Technology transfer and science are available to apply; only if you can open its land through the transparency and efficiency, and free of corruption and dependency. I can see grains are packed in sacks; clothing comes in packages that go into the cargo ships arriving to the world.
“Made in Africa” and “imported from Africa” is not a dream; all it needs is the union of African Nations. With the supply line of the financial and human capitals to Africa or South America, your bargains on technology transfer and tactical advancement, it was time God given in his balancing act of inequality and inequity to the world. This is a sustainable development in the southern hemisphere; and this is the moment of “The South”.
What is your plan now to seize the sustainable development in South Africa? Perhaps, it depends on your selfless diplomatic skills on the Unity and transparency to show the world how they may see ‘The South”.
May the Buddha bless you?
kirkomrik 08:40 12 Jan 12
Hey Nouriel,
Thanks for the great article. I see a reference once again to this controversy about "quantitative easing".
“Given the bearish outlook for US economic growth, the Fed can be expected to engage in another round of quantitative easing. But the Fed also faces political constraints, and will do too little, and move too late, to help the economy significantly. Moreover, a vocal minority on the Fed’s rate-setting Federal Open Market Committee is against further easing. In any case, monetary policy cannot address only liquidity problems – and banks are flush with excess reserves.”
Isn't it the case that the ability to assess the correct amount or degree of easing is being significantly complicated by the globalization of the U.S. dollar ... I mean, the U.S. dollar penetrating deeper and deeper into "foreign" economies?
Is capital flowing into foreign countries from the U.S., vice versa or neither? If the dollar is enjoying greater and greater representation of foreign wealth then I can see how this easing issue could become intractable?
- kk