Monday, January 4, 2010

Nouriel Roubini There Is a Global Deflationary Risk

Central bankers around the world are pulling out all the stops in order to combat a severe economic downturn that threatens to get even worse."There is a global deflationary risk," says Nouriel Roubini, economics professor at NYU Stern School and chairman of RGE Monitor. "That's what central bankers are worried about."In Europe today, the ECB and Bank of England slashed rates by greater than expected levels. Meanwhile, the Fed and Bank of Japan are taking "unorthodox actions" to pump liquidity into their economies. Both central banks are engaged in "quantitative easing," meaning rates are effectively zero regardless of what the official policy is."The Fed is trying to preemptively avoid a deflation trap [which] is very dangerous," Roubini says. "Whether they'll be successful or not, I don't know."The problem, he says, is there's going to be a "severe recession" both in the U.S. and globally in 2009. That means falling demand for goods and increased slack in the labor markets. That will put further downward pressure on prices and raise the risk of outright deflation, which is defined as: A persistent decline in general price levels, typically accompanied by a severe contraction in employment and economic output."It's hard to undo the structural factor" of falling demand meeting a supply glut of goods and services, he says, recommending the following policy actions to try and stem the deflationary tide:

A "huge" fiscal stimulus package: $500-$700B.
Recapitalize the banks faster, i.e., get TARP money distributed sooner.
Rather than focusing on mortgage rates, reduce the face value of debt owed by "insolvent homeowners" in order for them to be able to spend again and avoid a "tsunami of foreclosures." via youtube


Charlie Hazlett said...

He is recommending the exact opposite of what is needed. Less government spending is what we need, not more. "Stimulus" monies only stimulate favored enterprizes and take economic power away from the people and businesses which will bring the world out of the mess government spending has caused.

Anonymous said...

Until there is some modicum of job security, 'the people and businesses' will not spend and continue to retract, protecting what assets they do have. In a deflationary environment, real estate will continue to be put on the market for 'whatever price can be gotten' thus spiraling the decline of prices. A lower cost of goods bought and sold would be great in an economy only if the efficiencies gained can be redeployed in the free market rather than the government soaking up the gains in non-productive manner. If one thinks raising our taxes to bail out the economy works, try standing in a bucket and lifting yourself up. It won't work. Really, what WE are witnessing has been foreseen for nearly a generation: The transfer of wealth from the West to the East who can do it more efficiently (although we call that efficiency 'slave labor'. This can not be stopped. 15% of the world's population can not be economically superior forever -- though that era was less than 1,000 years -- without there being some kind of movement back to the mean. In our eyes, it just happened in a time compressed 2 years, when in reality, it's been in motion for decades.

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