Roubini warns crisis reaching a new and more dangerous stage
Posted on 17 May 2010 with 2 comments from readers
Nouriel Roubini, the New York University professor who first warned about the subprime crisis, has just published a new book entitled ‘Crisis Economics’ which charts the predictable course that such crises take.
His conclusion is that the public debt crises seen in Greece, Spain, Portugal, Italy, Ireland and Spain are but the second stage of the ongoing global financial crisis. The private sector losses of stage one have merely been transfered to the public sector debt for stage two.
Government debt a Ponzi scheme
This he judges ‘a new and more dangerous stage: Who will bail out governments that bailed out private banks and financial institutions? Our global debt mechanics are looking increasingly like a giant Ponzi scheme’.
He maintains that global governments also lack the political will to implement austerity programs to correct their structural deficits. That leaves two options open to policy makers, he contends: ‘inflation for countries that can monetize their deficits; or default for countries that borrow in a foreign country or can’t print their own’.
It also has to be said that the stimulus packages of early 2009 are now beginning to weaken. Certainly their point of maximum impact is over.
Even in China the stock market is tanking, causing the postponement of many planned initial public offerings. If the Chinese private sector falters this is bad news for the state-owned US car giant General Motors that last year sold more vehicles in China than its home market.
China hit the breaks on car sales last month with a big slowdown in recent runaway growth. Perhaps the record breaking half-of-GDP Chinese stimulus package is finally wearing off.
Stimulus wearing off
Indeed, that is the danger of huge artificial growth surges from government spending. They tend to end with capacity constraints, roaring inflation and a property price spike. This is why hedge fund manager Jim Chanos is shorting China.
ArabianMoney predicts a second US stimulus package this autumn but not before a big shake-out of global financial markets, if only because the political will to do it before rather than after a big correction just is not there. However, then the question will be its effectiveness.
Japan in the 1990s went from one stimulus package to another with little effect. But then at least Japan could afford this borrowing.
Roubini’s point is that debt capacity is reaching a tipping point and that will mean a bond crisis followed by much higher interest rates and an economic depression. His new book sounds worth reading.
2 Comments posted by readers:
ok, so the sky is falling and it time to herd. Where in Dubai to purchase silver bullion?
Ed Note: try the gold souk.
Hey, hey, don’t you dare steal my ‘Frankenstimulus’ nomenclature for the next theft of my tax money by the wealthy. I just love when these guys use the word ‘transfer’ of debt from the private, to the public, sector. No, it is actually THEFT, professor. People will have to pay more taxes, than if the debt owners, and stock owners, had been wiped out, and all their money used to pay the debts. That is true capitalism. What was done with the bailouts was welfare for the top 1% of America’s rich elite who control 95% of America’s total wealth. (Source: Citigroup memo) Many writers have described it as the greatest theft in human history.
It will be very difficult for US politicians to increase the National debt even more with another bailout. I will be surprised if it happens. Many of those who vote for another ‘Wall Street bailout’ will find their re-election in great jeopardy. Fox will give Sarah Palin her own jet to use to fly around and campaign against them.
The only answer may be to wipe out a lot of this debt. Adding more, and trying to pay it all off, may be impossible. It could prevent economic growth for decades. If I had to bet, I would say get ready for inflation, double digit inflation.
One other thing to consider is that the level of austerity needed to make significant progress on reducing the debt might, in itself, cause a depression. There may be no way out of this amount of debt without another Great Depression.
I recently read a summary of a 288 page book (Predicting the Next Credit Crisis, by Joshua Kosman) about private equity business takeovers on the National Public Radio site. Get ready for another 1,000 + US companies going bankrupt from the hugh debts created by these guys. It will hit in 2012, and may add 1.8 million more to the ranks of the unemployed. Banks will get hit again too. Predatory capitalism at its best. They PE guys got the real money, the companies got the crushing debt.