Roubini Sees High Risk of a U.S. Recession, Says Japan `Anemic' - Bloomberg

Nouriel Roubini, chairman of Roubini Global Economics, speaks during the World Capital Markets Symposium in Kuala Lumpur. Photographer: Goh Seng Chong/Bloomberg

New York University Professor Nouriel Roubini said there’s a high probability of another recession in the U.S., with Japan’s outlook “anemic,” underscoring risks to the global recovery.

China, the world’s fastest-growing major economy, may face greater headwinds should there be weak growth in the U.S. and Europe, Roubini said in Kuala Lumpur today, where he is attending a conference. Second-quarter gross domestic product figures for the U.S. are likely to be revised lower after “awful” June real-estate numbers, he also said.

Austerity measures to cut debt in advanced nations are hurting consumer and business confidence, and households in some of the largest economies are holding back spending. Emerging economies may have to get used to relying on domestic demand in a period of subdued growth for developed countries, Roubini said.

“We know the second half of the year is going to be worse than the first half of the year because of the tailwinds to growth from the fiscal stimulus” turning into austerity, he said. “The main scenario is an anemic recovery, but I don’t rule out that a double-dip will occur” in the U.S., he said.

An American jobless rate hovering near 10 percent is shaking consumer confidence and limiting spending, the biggest part of the economy. Federal Reserve policy makers last week said growth is likely to be “modest in the near term” and added that they are prepared to ease monetary policy further if needed to support the recovery.

Recessionary Growth

The world’s largest economy expanded at a 1.6 percent annual rate, the Commerce Department said last month. A U.S. growth rate of 1 percent will feel like a recession, Roubini said.

Steve Forbes, chief executive officer of publisher Forbes Inc., said separately today that the U.S. won’t have another economic contraction because political shifts, rising capital spending and a rebound in housing will keep the economy growing.

“This isn’t going to be a repeat of the 1970s,” Forbes said at a conference in Sydney. Warren Buffett, chairman of Berkshire Hathaway Inc., has also ruled out the prospect of a double-dip recession, in Sept. 14 comments at the Montana Economic Development Summit.

To contact the reporter on this story: Ranjeetha Pakiam in Kuala Lumpur at rpakiam@bloomberg.net; Shamim Adam in Singapore sadam2@bloomberg.net

To contact the editor responsible for this story: Chris Anstey at canstey@bloomberg.net

via bloomberg.com

Roubini forecast much of the fall to the bottom, so his forecast is alarming, however, it is common for those who are right for an early segment of economic shift, to miss the next shift. If we have a slow growth, then savers attempting to protect retirement savings from the retirement crisis should look to guaranteed investments. Wade Dokken

Zakaria: Don't Forget That The Bailouts Worked - Newsweek-comments by Wade Dokken

Fareed Zakaria is one of the finest American political commentators of our age, and why not?  He's born Indian, and Muslim.   Educated at Harvard and Yale.  Columnist for Newsweek, Time, and television commentator for ABC.  He now leads CNN's GPS, one of the most thought provoking Sunday news shows.  He's a centrist and his book of the week is always one of the smartest reads recommended.  I'd love to participate simply in his book club--but one tome per week?   I have a job.  

This column makes the point that is often lost today:  Should the policies of President George Bush and President Barack Obama be judged relative to the conditions of today, or rather what they would have been without their actions.   I would argue for the latter.  I have often said that I felt President Bush did almost everything right and I feel the same could be said for our current President.  Our situation is not the result of a particular set of executive choices.  Whether you are one to argue for lower taxes (which we have had), or more spending (which we have had), the real culprit appears to be that we failed to chose between the two and as we say to our children--you can't have both.   There is no eating your cake and having it too.  

We are facing a time and this time has been building when we need to make choices.  Do we spend on defense, which can be very valuable, or health care, which can be essential?   Do we have free time for our children and video games, or do our schools embrace the rigor of the world?   

I believe Fareed correctly points out that things would have been worse without the executive and legislative leadership in 2008.   Now we have to decide how we make them better.  Wade Dokken

 

September is the month for anniversaries from hell. Last week we remembered 9/11, and this week it’s time to recall the collapse of Lehman Brothers. Most of the discussion about the financial crisis has focused on a question that won’t go away: could the fall of Lehman have been prevented? For many this was the cardinal error that sparked the crisis. Others believe that Lehman was the precipitating factor, but that the financial system was so highly leveraged that something or other would eventually have broken its back.

We will never know what would have happened if Lehman had not failed. But we can be fairly sure that without its collapse, it would have been impossible to shock the political system into action. In the month after the fall, the U.S. government made a series of massive moves to restore stability to the financial system. And it’s clear that those actions saved the American—and thus the global—economy from total collapse.

Consider the facts. After the fall of Lehman, credit froze in the U.S. economy. Banks stopped lending to anyone, even Fortune 500 companies with gold-plated credit. People couldn’t get consumer and car loans at any price, businesses couldn’t get short-term loans to meet payroll. Private-sector borrowing—the lifeblood of modern economies—fell from 15 percent of GDP in late 2007 to minus 1 percent of GDP in late 2008.

Photos: The Financial Meltdown's Best Quotes

The Financial Meltdown's Best Quotes

The effects on the broader economy were immediate. GDP shrank by 6 percent in one quarter. Some 1.7 million people lost their jobs, the biggest drop in employment in 65 years, which was then exceeded in the next quarter when 2.1 million jobs evaporated. The net worth of American households decreased by $5 trillion, falling at the unprecedented rate of 30 percent a year. The worldwide numbers did not look much better. The contraction in global trade in late 2008 and early 2009 was worse than in 1929 and 1930. In other words, we were surely headed for something that looked like a Great Depression.

The U.S. government’s actions stopped the fall. Between the passage of the Troubled Asset Relief Program (TARP) and the massive quantitative easing of the Federal Reserve, markets realized that the government was backstopping the financial system, that credit was beginning to flow again, and that if no one else was going to inject capital into the system, the U.S. government would do so. Part substance, part symbolism, the effect was to restore confidence and stability to the system. In fact, the financial system bounced back so fast that the government will likely recover almost 90 percent of the funds it committed during those months, making this one of the cheapest financial bailouts in history.

The best evidence that TARP worked is that now, most people think it was unnecessary. In fact, about 60 percent of the country thinks it was a bad idea. Congressmen and senators who supported it now distance themselves; the most powerful line of attack against any of them tends to be that they voted for the bailouts. JFK said that victory has 100 fathers, and defeat is an orphan. But this is the strange case of a success that no one wants to claim.

 

Bank bailouts have always been unpopular. People hate to pay the bills for other people’s improvidence, and they detest having to do so for rich people. Viewed in moral terms, TARP is unconscionable. Financial institutions created the mess, and yet they were the ones being bailed out. But governance is sometimes about practical realities. Had the financial system gone under, the American economy would have come to a standstill. It very nearly did. We had to save the banks to save the economy.

The remarkable aspect of TARP, in retrospect, was the bipartisanship that made it possible. Hank Paulson and Barney Frank became comrades in arms. George W. Bush cooperated with Nancy Pelosi. Conservative Republicans endorsed a vast government appropriation. Liberal Democrats supported a bank bailout. The fact that people of wildly differing political persuasions all came to the conclusion that this was the right policy should be some proof that it was not ideologically motivated. For a moment in September 2008, Washington worked.

Alas, it won’t happen again. It took a crisis to concentrate the minds of politicians. The American system had a heart attack and we responded fast and well. Unfortunately, the problems we face in the future are less like heart attacks and more like cancer—problems that if unattended will grow and metastasize. In the long run, though, they’ll have the same effect

via newsweek.com

 

 

The economic benefits of inflation : The New Yorker-comments by Wade Dokken

This has been my contention since the financial crisis began--what we need is some inflation.    Bad for lenders, good for debtors.  We have more debtors.   Housing prices in the Western World have declined 15-30%.  Some cities far more.  E

quity prices have declined 30-40% from peak in some markets, and, in the U.S. they are down 30% on a real basis over the past dozen years.   This is causing severe and continuing stress.   We probably need a little inflation.   Western curre

ncies would be devalued-probably correctly.   Emerging markets currencies would appreciate--again, in some cases, appropriately.   Clearly, the annuity business would be great, but the key is the potential to reinvigorate the fabric of our economic culture.  

A humorous aside.  There are very few relevant, and current graphs on inflation, because as a national or world-wide concern, it simply doesn't exist.    Wade Dokken

In the two years since Lehman Brothers went under, the Federal Reserve has taken extraordinary measures to get the economy moving again. It has bailed out huge financial institutions, slashed interest rates almost to zero, lent hundreds of billions of dollars to American companies, and bought piles of dodgy assets. This pulled us back from the brink of disaster, but, as the fifteen million Americans out of work can testify, it hasn’t been enough to get the economy out of neutral. And so a surprising number of high-profile economists, on both the left and the right, think that it’s time for the Fed to try one more extraordinary measure: injecting the economy with a healthy dose of inflation.

Odd as that may sound, it’s actually not a crackpot concept. Right now, the U.S. economy has two fundamental, and interconnected, problems. First, consumers face huge debt left over from the borrowing spree of the past decade. Second, the dominant sentiment is caution—consumers are hesitant to spend, and businesses are hesitant to expand, invest, and hire. If the Fed were to moderately raise its inflation target—currently around two per cent—and commit itself to keeping prices moving higher for the next couple of years, it could help change this dynamic. If people believe that prices are going to rise in the future, they may be less cautious about spending in the present, since money that isn’t put to work will lose value. And, because inflation erodes the real value of debts, people’s debt burdens would shrink.

Unfortunately, when the Fed meets this week, it’s unlikely to be talking up the merits of an inflationboost. Central bankers are congenitally obsessed with the dangers of inflation and are more concerned with stable prices than with lost jobs. Also, the Fed, by its nature, looks after the interests of lenders, for whom inflation is generally bad news. But there’s a more basic reason, too: people really, really hate inflation. In polls, voters regularly cite high prices as one of their biggest concerns, even when inflation is low. A 2001 study that looked at the “macroeconomics of happiness” found that higher inflation put a severe dent in how happy people reported themselves to be. The distaste for inflation is such that a 1996 study (titled, aptly, “Why Do People Dislike Inflation?”), by the Yale economist Robert Shiller, found that, in countries around the world, sizable majorities said that they would prefer low inflation and high unemployment to high inflation and low unemployment, even if that meant that millions of extra people would go without work.

Weimar-style hyperinflation is, of course, an awful thing. But people loathe inflation even in moderate doses, where the evidence suggests it does little damage. The best estimates of the cost of inflation find that even a ten-per-cent inflation rate—much higher than anyone is currently pushing for—shrinks consumption by just 0.1 to 0.8 per cent. There are other costs, to be sure: inflation shrinks the value of people’s savings, and uncertainty about future prices makes business decisions less efficient. There’s also the risk of inflation getting out of control. But the historical record suggests that the risk of three-per-cent inflation turning into hyperinflation is very small.

So why is inflation unpopular? The biggest reason, Shiller found, was simply that people believe higher prices reduce their standard of living and make them “poorer.” This is obviously true for people living on fixed incomes or off their savings, but for everyone else, as many studies have shown, inflation translates into higher incomes as well as higher prices, and it typically doesn’t have much of an effect either way on people’s standard of living. (After all, we’ve had sixty years of inflation in the postwar era, yet we’re much more prosperous than we were in 1950.) That’s not how it feels, though: myopia leads us to focus on how much more we have to pay, rather than on how much more we earn. Inflation also sets off other alarm bells. It often increases uncertainty, which most people are averse to, and, because it can be described as “weakening” a country’s currency, it affects morale. Shiller found that people associated rising inflation with dwindling social cohesion. There’s also a moral dimension: we connect inflation to a lack of discipline and failure to live within our means. The most striking thing about Shiller’s study was that no one surveyed mentioned any possible benefits of inflation, even though to Americans currently besieged by debts it would be a lifesaver.

This intuitive prejudice against inflation may not be purely rational, but in normal times it’s beneficial: it encourages sober habits and discourages quick fixes. But, in times of crisis, other policies may succeed where pure rectitude can’t. After the Second World War, when the U.S. was struggling beneath a huge pile of debt, higher inflation helped shrink the real national debt to manageable proportions. And, in times when people are reluctant to take risks, a little inflation can help grease the skids. In doing this, though, inflation helps debtors and spenders at the expense of creditors and savers. It’s easy to see why this makes us uncomfortable. It seems to reward those who have behaved recklessly, and to punish those who played by the rules, saving their money and living frugally. But the economy doesn’t exist, in the end, to reward virtue and punish vice. It exists to maximize our well-being, and, currently, doing that may require helping the undeserving and irresponsible, if only because there are so many of them. Boosting inflation isn’t the right policy, but it may just be the correct one. ♦

via newyorker.com

 

How the Government Dealt With Past Recessions

via nytimes.com

 

The Great Depression vs 2007-2010 with observations by Wade Dokken

This recessions is painful beyond most memories, particularly for the lower skilled Americans.   Underemployment is creating great anxiety for the educated class and unemployment is devastating for the lower skill cohort of Americans.   Many analogies are being made with the Great Depression.

This post shows how fundamentally worse was the Great Depression than today.

The Great Depression vs. 2007-2010

 

 

The chart above shows monthly unemployment rates from: a) January 1931 to December 1940 (120 months) and b) January 2007 to August 2010.  We hear a lot of comparisons between the recent recession and the Great Depression, and the chart above shows that those comparisons are hugely exaggerated.  Consider the fact that there were 127 consecutive months of double-digit unemployment rates between November 1930 and May 1941, and 21 consecutive months with unemployment above 20% from April 1932 to December 1933, with a maximum of 25.6% in May of 1933.  Then compare that to the recent recession, where there were only three consecutive months of double-digit unemployment rates, with a maximum rate of 10.1% in October 2009.  

Bottom Line: As bad as the recent recession might have been, it was never anywhere close to the disastrous economic conditions of the 1930s.   

 

via mjperry.blogspot.com