Tuesday, April 30, 2013

Roubini Speaks -- Important Economic Predictions

Nouriel Roubini's latest projection for the next few years is today's most important read about economics.  He's not called Dr. Doom for nothing. He points out many pitfalls. But through a cloud of unknowing he seems optimistic about the distant future. 

Shorter Roubini -- Quantitative Easing is going away and if everyone can learn to behave we won't get into trouble.

As I read this prediction I thought how much the management of economics is like dealing with substance abuse. Credit and debt (two sides of the same coin) are, like alcohol, neither inherently good or bad. However they become problematical when abused.

Anyone who has dealt with alcoholism, either their own or someone else's,  knows there are several ways to deal with it. Quitting altogether is the ultimate goal because the long-term toll is both serious and expensive. Generally speaking there are two approaches:-- "cold turkey" or gradual reduction. Experienced alcoholics and professionals who deal with them know well that stopping all at once is dangerous. Simply stated, abruptly stopping alcohol can kill someone who is seriously drunk.  That approach is not advisable except under the care of medical professionals. The non-medical alternative is to reduce the intake of alcohol over several days as the body adjusts to a diet of food and non-alcoholic liquids, usually enduring delirium tremens (the DT's) on the way to sobriety. It is not a pretty picture.

Quantitative Easing has been the substance of choice for the economy for the last several years and the time has come for the economy to detox.

The Trapdoors at the Fed’s Exit
or "How can we get this drunk back to sobriety without killing him?"
The ongoing weakness of America’s economy – where deleveraging in the private and public sectors continues apace – has led to stubbornly high unemployment and sub-par growth. The effects of fiscal austerity – a sharp rise in taxes and a sharp fall in government spending since the beginning of the year – are undermining economic performance even more. 
Indeed, recent data have effectively silenced hints by some Federal Reserve officials that the Fed should begin exiting from its current third (and indefinite) round of quantitative easing (QE3). Given slow growth, high unemployment (which has fallen only because discouraged workers are leaving the labor force), and inflation well below the Fed’s target, this is no time to start constraining liquidity. 
The problem is that the Fed’s liquidity injections are not creating credit for the real economy, but rather boosting leverage and risk-taking in financial markets. The issuance of risky junk bonds under loose covenants and with excessively low interest rates is increasing; the stock market is reaching new highs, despite the growth slowdown; and money is flowing to high-yielding emerging markets.
In other words, since the problem is bigger than any doctor can manage, we're gonna be doing it the old-fashioned way, detoxing by weaning off the booze a little at a time, hoping that when the DT's come the patient will not lose hope and go back to drinking.

Once again he mentions the difference between the real economy and the financial markets. As those of us in the forty-seven percent know well, the real economy is not called "real" by mistake. The real economy is about having an income to meet everyday expenses of living. Food, shelter and transportation are not optional. Even homeless people must eat, keep out of the elements and be able to walk if they are to avoid facing death. These essentials remain true all the way from negative net worth to zero net worth (all assets minus all debts = zero) which is where nearly half the population now lives.

People in the real economy care not distracted by anything that happens in the financial markets. That is another universe for them. But by some Divine sense of irony, it is the people in the financial markets who control both worlds. Go to the link for Roubini's take on the gory details of what may or may not happen. The old saying is -- It's hard to make predictions, especially about the future.

So he concludes:
The exit from the Fed’s QE and zero-interest-rate policies will be treacherous: Exiting too fast will crash the real economy, while exiting too slowly will first create a huge bubble and then crash the financial system. If the exit cannot be navigated successfully, a dovish Fed is more likely to blow bubbles.
The best hope for the rest of us is that the small number of people controlling the financial markets can find their way out of a drunken stupor to help the real economy recover. 


Am I the only person connecting the huge disparity of wealth between rich and poor with economic uncertainty? It seems to me as long as nearly all new wealth continues to flow to those who are already wealthy the chances of the real economy making a real recovery are seriously reduced. 

No comments:

Post a Comment