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| Economist Nouriel Roubini speaks during a panel session on the first day of the the World Economic Forum meeting in Davos, Switzerland, Wednesday. |
Roubini, widely acknowledged to have predicted the crash of 2008, sees tough times ahead for the global economy and is warning that without major policy changes things can still get much worse.
He also warned that a conflict with Iran over its controversial nuclear program could lead to a global recession.
Until Europe radically reforms itself and the U.S. gets serious about its own debt mountain, Roubini said, the world economy will continue to stumble along to the detriment of large chunks of the world's population who will continue to see their living standards under pressure, even if they have a job.
Meanwhile, International Monetary Fund Managing Director Christine Lagarde — speaking Saturday at the World Economic Forum meeting in Davos, Switzerland — said Europe was making progress to overcome the euro zone crisis, but need to do more to boost its financial firewall to contain the contagion of the debt crisis and restore trust.
"There is work under way. There is progress as we see it," Lagarde told a panel discussion at the World Economic Forum.
"But it is critical that the euro zone members actually develop a clear, simple, firewall that can operate both to limit the contagion and to provide this sort of act of trust in the euro zone so that the financing needs of that zone can actually be met," she said.
She added that there would be need for IMF funds to help the euro zone.
Roubini, a professor of economics and international business at New York University, spoke in an interview this week with The Associated Press at a dinner on the sidelines of the meeting, where he is one of the hotly pursued stars.
"We have to shift our investment from things that are less productive like the financial sector and housing and real estate to things that are more productive like our people, our human capital, our structure, our technology, our innovation," he said.
Roubini said slow growth in advanced economies will likely lead to "a U-shaped recovery rather than a typical V," and it may last for another three to five years because of high debt.
"Once you have too much debt in the public and private sector, the painful process could last up to a decade, where economic growth remains weak and anemic and sub-par until we have cleaned up the balance sheet and invested in the things that make us more productive for the future," he said.
Iran warns Europe
On Friday, Iran warned that it may halt oil exports to Europe next week in a move calculated to hurt ailing European economies.
The Tehran government — grappling with its own economic crisis under Western trade and banking embargoes — will host a rare visit on Sunday by U.N. nuclear inspectors for talks that the ruling clergy may hope can relieve diplomatic pressure as they struggle to bolster public support.
Since the U.N. watchdog lent independent weight in November to the suspicions of Western powers that Iran is using a nuclear energy program to give itself the ability to build atomic bombs, U.S. and EU sanctions and Iranian threats of reprisal against Gulf shipping lanes have disrupted world oil markets and pushed up prices.
Amid forecasts Iran might be able to build a bomb next year, and with President Barack Obama facing re-election campaign questions on how he can make good on promises — to Americans and to Israel — not to tolerate a nuclear-armed Islamic Republic, a decade of dispute risks accelerating towards the brink of war.
The U.S. Treasury Department said on Friday it would send its undersecretary for terrorism and financial intelligence, David Cohen, to Britain, Germany and Switzerland next week to talk about how to enforce sanctions against Iran's central bank.
Those sanctions aim to starve Iran of funds for developing nuclear weapons.
Western diplomats see little immediate prospect that renewed talks between Iran and the United Nations' International Atomic Energy Agency, scheduled from Sunday to Tuesday in Tehran, would result much in the way of concessions to Western demands.
EU states have given themselves until July to enforce an oil import embargo on Iran.
"We have to shift our investment from things that are less productive like the financial sector and housing and real estate to things that are more productive like our people, our human capital, our structure, our technology, our innovation," he said.
Roubini said slow growth in advanced economies will likely lead to "a U-shaped recovery rather than a typical V," and it may last for another three to five years because of high debt.
"Once you have too much debt in the public and private sector, the painful process could last up to a decade, where economic growth remains weak and anemic and sub-par until we have cleaned up the balance sheet and invested in the things that make us more productive for the future," he said.
Iran warns Europe
On Friday, Iran warned that it may halt oil exports to Europe next week in a move calculated to hurt ailing European economies.
The Tehran government — grappling with its own economic crisis under Western trade and banking embargoes — will host a rare visit on Sunday by U.N. nuclear inspectors for talks that the ruling clergy may hope can relieve diplomatic pressure as they struggle to bolster public support.
Since the U.N. watchdog lent independent weight in November to the suspicions of Western powers that Iran is using a nuclear energy program to give itself the ability to build atomic bombs, U.S. and EU sanctions and Iranian threats of reprisal against Gulf shipping lanes have disrupted world oil markets and pushed up prices.
Amid forecasts Iran might be able to build a bomb next year, and with President Barack Obama facing re-election campaign questions on how he can make good on promises — to Americans and to Israel — not to tolerate a nuclear-armed Islamic Republic, a decade of dispute risks accelerating towards the brink of war.
The U.S. Treasury Department said on Friday it would send its undersecretary for terrorism and financial intelligence, David Cohen, to Britain, Germany and Switzerland next week to talk about how to enforce sanctions against Iran's central bank.
Those sanctions aim to starve Iran of funds for developing nuclear weapons.
Western diplomats see little immediate prospect that renewed talks between Iran and the United Nations' International Atomic Energy Agency, scheduled from Sunday to Tuesday in Tehran, would result much in the way of concessions to Western demands.
EU states have given themselves until July to enforce an oil import embargo on Iran.
The EU accounted for 25 percent of Iranian crude oil sales in the third quarter of 2011. But China, India and others have made clear that they are keen to soak up any spare Iranian oil, even as U.S. Treasury measures to choke Tehran's dollar trade make it harder to pay for supplies.
Moayed Hosseini-Sadr, a member of the energy committee in the legislature, said there would be no delay of the kind the EU allowed to its members.
"If the deputies arrive at the conclusion that the Iranian oil exports to Europe must be halted, parliament will not delay a moment," Hosseini-Sadr said. "The Europeans will surely be taken by surprise and will understand the power of Iran."
The Associated Press and Reuters contributed to this report.
We should take a lesson from Odysseus, who poured wax into the ears of his crew and had himself lashed to the mast of his ship to resist the Siren call.
~*~*~*~*~*~*~*~*~*~*~*~*~*~*~*~*~*~My Thoughts:
As it has been pointed out to me and I agree, in the short-term, government should incur more debt and invest in private sector jobs through infrastructure, technology innovations, and creating industrial clusters to reduce manufacturing cost and improve the speed of delivery by suppliers, thereby improved productivity to be competitive with other countries.
The Republicans introduced the repeal of Glass-Seagall Act, lobbyists convinced many in both houses and of both parties that it would be best for the economy so America would lead the world in economic growth, thus allowing the merge of Goldman-Sac and Travelers so they can package new types of investment instruments so to retain their large clients who wanted the combination of investment banking and commercial banking in one bank, rather than their clients having to use two or loose them to a bank that could offer that level of product.
Bill Clinton was also persuaded that the law was out dated and restricting economic growth, so he supported it in Congress and sign the bill when it passed.
FED chairman Allen Greenspan was an advocate of the repeal of the Glass-Seagall Act and testified that by repealing the act, it would create an environment that would stimulate economic growth at a faster pace. He has now admitted he was very wrong in that assumption.
Combine this with the deregulation that caused the Savings & Loan by Ronald Reagan, and anything goes SEC and FED under the Bush administration, and the inevitable happened.
Why have we not learned from FDR and the depression the best way to work our way out of this mess. Plus why are there not bankers in prison or at least expelled from the industry?
Maybe the AG Eric Holder with the selected states AGs will finally do the investigation that should have been done in 2009.
But unfortunately the current FED chairman, Ben Bernanke continues to support this economic theory of unrestricted markets.
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Published on Saturday, January 28, 2012 by Reuters Austerity budgets, by reducing government spending, will only make incomes fall more. The only way to make incomes rise is to make spending rise, which in the short run means more borrowing by governments to enable more public sector spending
The Siren Call of Austerity
The World Economic Forum opened in Davos amid choruses of central bankers and economists calling for governments to cut spending.
This message of austerity is like the call of the ancient Sirens, whose music lured sailors to shipwreck.
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| This message of austerity is like the call of the ancient Sirens, whose music lured sailors to shipwreck. |
We should take a lesson from Odysseus, who poured wax into the ears of his crew and had himself lashed to the mast of his ship to resist the Siren call.
Austerity supporters are selling the idea that governments, like families, must cut back when income shrinks. But economically, governments are not like families.
Firing teachers, cops and government clerks will, for sure, reduce public spending. But budgets, like the song of the Sirens, are only part of the story. Listen only to the alluring lyrics and, like the many voyagers before Odysseus, we will suffer disastrous consequences - in our case falling incomes and worsening economies.
The full economic story begins with this principle taught to every economics student: spending equals income and income equals spending. Cut spending and incomes must fall; cut incomes and spending must fall.
Those who disagree with this say that only private spending can create wealth and that government spending is inefficient. I think the first argument is wrong, but the second is often true, which is why citizens need to pay close attention to their government.
When private spending shrinks, then either government spending must grow to make up for it or the other side of the equation, income, must shrink.
If we increase spending today by borrowing, we create a claim on future income. Families with debt must divert part of their future income to interest and principal to service that debt or go bankrupt. Governments are different, provided they have monopoly control of their currency. By definition, no sovereign government can ever go broke in its own currency.
NO TO AUSTERITY
The United States government, which has a monopoly on its currency, is $15.2 trillion in debt, roughly the same as the entire output of the economy for a year.
That figure has been sung in a refrain about massive debt threatening to bring down the economy and cause inflation. Facts, however, show otherwise.
The country was much deeper in debt, relative to the size of the economy, in 1946 than it is today and yet what followed was decades of prosperity. The 1946 debt remains and, after six decades of growth, it is inconsequential.
In Japan, government debt is roughly twice annual economic output and yet the country continues to function because real interest rates are at or below zero.
To be sure, conditions can change and interest rates can rise sharply, though central banks have ways to limit that. But that is not the problem today. The problem today is shrinking incomes due to shrinking spending.
Austerity budgets, by reducing government spending, will only make incomes fall more. The only way to make incomes rise is to make spending rise, which in the short run means more borrowing by governments to enable more public sector spending.
After reading the news from Davos, ask yourself why we should listen to the Siren song of the financial elite. After all, the people who steered our financial ship into dangerous waters in the first place were at the very top of this group. We should listen more to those will suffer from austerity budgets: children who only get one chance at an education, the sick and disabled unable to support themselves and seniors too old to work.
If, like Odysseus, we wish to row past our current economic straits into a new sea of prosperity, the one thing we must not do is be driven to economic madness by the Siren call of austerity budgets.
© 2012 David Cay Johnston
Thanks you for the correction David.
Here is a video by David Cay Johnston about this subject. Please take the time to view it.
As it has been pointed out to me and I agree, in the short-term, government should incur more debt and invest in private sector jobs through infrastructure, technology innovations, and creating industrial clusters to reduce manufacturing cost and improve the speed of delivery by suppliers, thereby improved productivity to be competitive with other countries.
The Republicans introduced the repeal of Glass-Seagall Act, lobbyists convinced many in both houses and of both parties that it would be best for the economy so America would lead the world in economic growth, thus allowing the merge of Goldman-Sac and Travelers so they can package new types of investment instruments so to retain their large clients who wanted the combination of investment banking and commercial banking in one bank, rather than their clients having to use two or loose them to a bank that could offer that level of product.
Bill Clinton was also persuaded that the law was out dated and restricting economic growth, so he supported it in Congress and sign the bill when it passed.
FED chairman Allen Greenspan was an advocate of the repeal of the Glass-Seagall Act and testified that by repealing the act, it would create an environment that would stimulate economic growth at a faster pace. He has now admitted he was very wrong in that assumption.
Combine this with the deregulation that caused the Savings & Loan by Ronald Reagan, and anything goes SEC and FED under the Bush administration, and the inevitable happened.
Why have we not learned from FDR and the depression the best way to work our way out of this mess. Plus why are there not bankers in prison or at least expelled from the industry?
Maybe the AG Eric Holder with the selected states AGs will finally do the investigation that should have been done in 2009.
But unfortunately the current FED chairman, Ben Bernanke continues to support this economic theory of unrestricted markets.
@ Bob Murri,
ReplyDeleteactually Roubini and I see things similarly.
This is, as bank economist Richard Koo says, a balance sheet recession. In the long run (as with my WW2 example) growth will make the relative size of the debt shrink, but for that happen there has to be growth.
In the short- to mid-term adding debt to the government balance sheet is the better option than austerity budgets.
A video with helpful graphics goes with my column (and while I write about economics, I am a journalist). It is posted at the Reuters youtube channel at
http://www.youtube.com/watch?v=T9KzJCPKXow
Thank you for correcting me and the link.
ReplyDelete