Nouriel Roubini of the Financial Times is
not optimistic about the US economy:
“the debate is between those – most of the economic consensus – who expect
a V-shaped recovery with a rapid return to
growth and those – like myself – who believe it will be U-shaped, anemic and
below trend for at least a couple of years, after a couple of quarters of rapid
growth driven by the restocking of inventories and a recovery of production
from near Depression levels.”
Some of his reasons are interesting and
worth highlighting:
“...this is a crisis of solvency, not just liquidity, but true deleveraging
has not begun yet because the losses of financial institutions have been
socialised and put on government balance sheets. This limits the ability of
banks to lend, households to spend and companies to invest.”
“...in countries running current account deficits, consumers need to cut
spending and save much more, yet debt-burdened consumers face a wealth shock
from falling home prices and stock markets and shrinking incomes and
employment.”
“...the releveraging of the public sector through
its build-up of large fiscal deficits risks crowding out a recovery in private
sector spending. The effects of the policy stimulus, moreover, will fizzle out
by early next year, requiring greater private demand to support continued
growth.”
“...the reduction of global imbalances implies
that the current account deficits of profligate economies, such as the US, will
narrow the surpluses of countries that over-save (China and other emerging
markets, Germany and Japan).”
As I have
frequently said, the bottom line is that economic wealth is built only on work,
savings and – these days – technological improvements. Obama’s profligate
spending on things totally unrelated to productivity – the ultimate source of
everybody’s prosperity – undercuts all of these things.
However, prior to
Obama, there were many things wrong with the economy that do not have anything
to do with him. Looking back on it 10 years from now, I think it will be
recognized that the lesson this recession is teaching us is that an economy
that does not make things cannot be prosperous. Today, we are told that the
current service-based economy is a logical step forward from yesterday’s
manufacturing-based economy, the way it was an improvement on the
agriculture-based economy that it replaced. A bad but illuminating trend in the
past 10 years was people with advanced engineering and science degrees working
in finance (where they were in demand because of their math skills). They
worked for hedge fund managers because they found it more profitable than R
& D. What a colossal waste of talent! While the argument that marketplace speculation
is a social good because arbitrage makes the markets more efficient is valid, what
all too often resulted in practice was leveraged speculation - a bubble that
sooner or later had to burst. All that hedge-funding was just transient
economic noise that created little long term wealth.
In the end, I
think we are in the process of relearning the fundamental truth that the GDP of
a country is nothing more than the sum total of all the goods its people make and
the services they render. While it is inevitable that the portion of workers in
factory jobs will shrink thanks to automation, just as the proportion of
farmers in our society has declined, the total amount of manufactured goods must
increase to justify our GDP, just as we produce more food than ever with fewer
farmers.
While predicting
a U-shaped recession, Roubini also speculated on the prospects of a W-shaped
recession:
“There are also now two reasons why there is a
rising risk of a double-dip W-shaped recession. For a start, there are risks
associated with exit strategies from the massive monetary and fiscal easing:
policymakers are damned if they do and damned if they don’t. If they take large
fiscal deficits seriously and raise taxes, cut spending and mop up excess
liquidity soon, they would undermine recovery and tip the economy back into
stag-deflation (recession and deflation).
But if they maintain large budget deficits, bond
market vigilantes will punish policymakers. Then, inflationary expectations
will increase, long-term government bond yields would rise and borrowing rates
will go up sharply, leading to stagflation [recession and inflation, ed.].”
I am reminded of what the great economist Friedrich Hayek once said about
central banks. The problem with them is that the entire economy rests in the judgment
of one man whose decisions on monetary policy affect us all. If he guesses
wrong once, we have a recession. What’s worse, it is very difficult to guess
right because the effect of every decision is 6 to 12 months down the road, leading
central banks to overreact when their initial moderate actions fail to have
immediately positive effects.