Roubini: Global economy running on one engine

More bad news from "Dr. Doom."  Doesn't Roubini know that a Republican Congress will solve everything, and that despite its higher growth rate, the U.S. is still inferior to austerity-loving Europe?

Roubini's analysis is going to be so far over the heads of my Tea Party friends who think belt-tightening by the public sector is the answer to everything, the European example be damned. 

Bottom line: Team Keynes was right. Either you're a Keynesian cheerleader and get to sip his milkshake at the victory party, or you're with the losing team sent home to your trailer community in mirthless shame on a quiet bus.

The Single-Engine Global Economy

By Nouriel Roubini

October 31, 2014 | Project Syndicate

The global economy is like a jetliner that needs all of its engines operational to take off and steer clear of clouds and storms. Unfortunately, only one of its four engines is functioning properly: the Anglosphere (the United States and its close cousin, the United Kingdom).

The second engine – the eurozone – has now stalled after an anemic post-2008 restart. Indeed, Europe is one shock away from outright deflation and another bout of recession. Likewise, the third engine, Japan, is running out of fuel after a year of fiscal and monetary stimulus. And emerging markets (the fourth engine) are slowing sharply as decade-long global tailwinds – rapid Chinese growth, zero policy rates and quantitative easing by the US Federal Reserve, and a commodity super-cycle – become headwinds.

So the question is whether and for how long the global economy can remain aloft on a single engine. Weakness in the rest of the world implies a stronger dollar, which will invariably weaken US growth. The deeper the slowdown in other countries and the higher the dollar rises, the less the US will be able to decouple from the funk everywhere else, even if domestic demand seems robust.

Falling oil prices may provide cheaper energy for manufacturers and households, but they hurt energy exporters and their spending. And, while increased supply – particularly from North American shale resources – has put downward pressure on prices, so has weaker demand in the eurozone, Japan, China, and many emerging markets. Moreover, persistently low oil prices induce a fall in investment in new capacity, further undermining global demand.

Meanwhile, market volatility has grown, and a correction is still underway. Bad macro news can be good for markets, because a prompt policy response alone can boost asset prices. But recent bad macro news has been bad for markets, owing to the perception of policy inertia. Indeed, the European Central Bank is dithering about how much to expand its balance sheet with purchases of sovereign bonds, while the Bank of Japan only now decided to increase its rate of quantitative easing, given evidence that this year’s consumption-tax increase is impeding growth and that next year’s planned tax increase will weaken it further.

As for fiscal policy, Germany continues to resist a much-needed stimulus to boost eurozone demand. And Japan seems to be intent on inflicting on itself a second, growth-retarding consumption-tax increase.

Furthermore, the Fed has now exited quantitative easing and is showing a willingness to start raising policy rates sooner than markets expected. If the Fed does not postpone rate increases until the global economic weather clears, it risks an aborted takeoff – the fate of many economies in the last few years.

If the Republican Party takes full control of the US Congress in November’s mid-term election, policy gridlock is likely to worsen, risking a re-run of the damaging fiscal battles that led last year to a government shutdown and almost to a technical debt default. More broadly, the gridlock will prevent the passage of important structural reforms that the US needs to boost growth.

Major emerging countries are also in trouble. Of the five BRICS economies (Brazil, Russia, India, China, and South Africa), three (Brazil, Russia, and South Africa) are close to recession. The biggest, China, is in the midst of a structural slowdown that will push its growth rate closer to 5% in the next two years, from above 7% now. At the same time, much-touted reforms to rebalance growth from fixed investment to consumption are being postponed until President Xi Jinping consolidates his power. China may avoid a hard landing, but a bumpy and rough one appears likely.

The risk of a global crash has been low, because deleveraging has proceeded apace in most advanced economies; the effects of fiscal drag are smaller; monetary policies remain accommodative; and asset reflation has had positive wealth effects. Moreover, many emerging-market countries are still growing robustly, maintain sound macroeconomic policies, and are starting to implement growth-enhancing structural reforms. And US growth, currently exceeding potential output, can provide sufficient global lift – at least for now.

But serious challenges lie ahead. Private and public debts in advanced economies are still high and rising – and are potentially unsustainable, especially in the eurozone and Japan. Rising inequality is redistributing income to those with a high propensity to save (the rich and corporations), and is exacerbated by capital-intensive, labor-saving technological innovation.

This combination of high debt and rising inequality may be the source of the secular stagnation that is making structural reforms more politically difficult to implement. If anything, the rise of nationalistic, populist, and nativist parties in Europe, North America, and Asia is leading to a backlash against free trade and labor migration, which could further weaken global growth.

Rather than boosting credit to the real economy, unconventional monetary policies have mostly lifted the wealth of the very rich – the main beneficiaries of asset reflation. But now reflation may be creating asset-price bubbles, and the hope that macro-prudential policies will prevent them from bursting is so far just that – a leap of faith.

Fortunately, rising geopolitical risks – a Middle East on fire, the Russia-Ukraine conflict, Hong Kong’s turmoil, and China’s territorial disputes with its neighbors – together with geo-economic threats from, say, Ebola and global climate change, have not yet led to financial contagion. Nonetheless, they are slowing down capital spending and consumption, given the option value of waiting during uncertain times.

So the global economy is flying on a single engine, the pilots must navigate menacing storm clouds, and fights are breaking out among the passengers. If only there were emergency crews on the ground.

Ominous interview with Dr. Doom

Should we pay attention to one of the only guys who predicted the global financial crisis, even if the solutions he offers run counter to the growing global consensus that austerity (what I call the "hunker down" approach) is the answer? Heck, yeah! He's Dr. Doom! Perhaps soon to be known as Dr. Double Dip.

Interview with Nouriel Roubini

September 23, 2011 | Emerging Markets

Fears have grown this week that we are on the verge of a new global financial crisis. What's your view?

In my view there is a high likelihood that there is going to be another global financial crisis. My data suggests that most advanced economies are already entering a recession. We're not any more in an anaemic recovery, we're not any more at stall speed. We're at the beginning of a contraction. I think there's a contraction already in most of the eurozone, there is a contraction in the US, also in the UK. That's the first point.

The second point is we're running out of policy bullets – monetary, fiscal – backstopping the financial system.

And third, the eurozone is a source of systemic risk. If there is a disorderly situation in the eurozone it's going to be worse than Lehman.

At this point it's not any more Greece or Ireland or Portugal. The contagion has spread to Italy and Spain. In the case of Italy and Spain the critical thing is that even if you believe that Italy and Spain are illiquid but solvent, even adjusting from the reforms, they've lost credibility in the markets. It's going to take them at least a year to regain it.

Therefore you need a lender of last resort to backstop the sovereigns until they regain the credibility to avoid spreads going up and leading to a self-fulfilling run. And there are only a very few options, none of them feasible. One of them is the [eurobonds]. It's going to take at least two years until they can pass that and it's going to be approved by a treaty.

The other option is the ECB doing the dirty job. But the ECB constitutionally, legally, is not allowed to be a systemic lender of last resort for sovereigns.

The third option is to triple the EFSF (European Financial Stability Facility). But they're not even able to pass the current extension of the EFSF. If tomorrow the Germans have to triple the EFSF, that is a political mission impossible.

So my worry is that the EFSF is going to run out of money and then there is not going to be a lender of last resort to backstop Italy and Spain. And that could be a source of a systemic break down of the eurozone, with global financial consequences worse than Lehman.

What can policymakers do now to minimize the inevitable fallout?

I wrote a paper recently in which I have an eight-point plan to highlight the kind of policies which are needed. One, much more monetary and quantitative easing, not just quantitative easing but credit easing. Two, short-term fiscal stimulus in the countries that can still do it. The US, UK, Germany, core of the Eurozone, Japan, it's the periphery that's doing fiscal retrenchment. You have to postpone the austerity. In the short-run, we need fiscal stimulus. We need to provide massive amounts of lender-of-last-resort support to Italy and Spain to make sure that illiquid but solvent sovereigns do not have a self-fulfilling run. We need an orderly restructuring of the debt of governments, of banks, of households that are insolvent. We need to have a massive recapitalization of the European banks through a TARP (Troubled Asset Relief Programme) type of programme for the European banks. We need to support emerging markets by providing monetary and fiscal support to the countries that are going to get in trouble, and to provide support through the IMF and other international financial institutions. We have to provide credit to small and medium-sized enterprises and households that are squeezed. We need to have also an orderly exit of countries that are not going to regain competitiveness in the eurozone, like Greece and potentially also Portugal. And you have to do this in a clear, holistic and front-loaded way. So there are many things that we need to do. I fear that the politicians in the US, in Europe, in UK are not going to have the political willingness to do it in their own countries, let alone coordinate it internationally.

So what's the likely outcome given this policy gridlock in the key countries?

At this point the debate is not whether we're going to have a double dip or not: the double dip has started. The only question is: are we going to have a mild recession that's going to last for three quarters in advanced economies or are we going to have a severe recession and another global financial crisis? The answer to that question depends on whether you can keep Italy and Spain together. It's not even about Greece.

That depends on Germany taking the risk of essentially backstopping Italy and Spain – or the EFSF, e-bond, or the ECB doing the job. Because whichever way you do it, today the German taxpayer is backstopping German debts and the ones of Greece, Ireland and Portugal. But you need now to backstop EU3 trillion of Italian and Spanish debt. That implies that if Italy and Spain are not illiquid but solvent, but they are insolvent Germany takes a huge amount of credit risk. Germany and France could both lose their triple-A status. So there is political resistance to this quasi-fiscal union in Germany and the core of the eurozone.

But if you don't do it, it'll be a disorderly break-up of the eurozone. So you need to go in the direction of a quasi-fiscal union in the sense of providing liquidity support to illiquid but solvent sovereigns that are too big to fail and too big to be saved. That's the key issue.

How quickly are markets likely to turn aggressively on Italy and Spain?

Well Italian spreads are already 500 basis points. Even if the EFSF is approved – because right now the backstop is provided by the ECB but the ECB has said 'it is not my job' – we need three times the EFSF. Once the EFSF is approved, out of the E440 billion, half of it has already been committed to Greece, Ireland and Portugal and to their banks.

So markets are going to look through it and say there are only E200 billion left and we're going to run out of those E200 billion, at the rate at which there is pressure now on Italy and Spain, by the year-end at the latest or by March of next year.

If it takes two years until an e-bond is essentially voted, you have a window of two years or a year and a half in which Italy and Spain risk losing market access without there being an alternative. You need either e-bonds or EFSF or the ECB to do the job. So that's the risk and it's going to happen soon enough.

People are going to see it as soon as the EFSF is approved and people realize that there is not enough money.

This is clearly a European problem with global consequences – but which nevertheless requires a European solution. Is there anything the international community can feasibly do?

Well you have to make an agreement that we need, for example, coordinated monetary expansion among advanced economies. We need a coordinated agreement that we need a fiscal stimulus in all advanced economies, apart from those in the peripheral eurozone that are forced to do fiscal austerity. We need to have a commitment to a mechanism that provides liquidity support to Italy and Spain that is three or four times larger than the E440 billion. We need to have a European plan to essentially recapitalize, Tarp-style, the European banks.

You need to do lots of things that show that you see what the problem is and you're willing to do whatever is necessary to avoid a freefall. You need to do it within the eurozone and you need to do some things on a global basis like the monetary and fiscal stimulus.

I don't think we're going to get there. Tim Geithner went to the [Econfin] minister's meeting [last week] and he was told: 'don't come and tell us what to do, we want fiscal austerity we don't want to recapitalize the banks, we don't want monetary expansion.'

So there is a fundamental disagreement between US, Europe, UK and Japan – even on the necessary policies. That's the gridlock.

So in light of this gridlock, the paralysis among the big decision-making bodies, where is the leadership in this crisis? Where should it come from?

Well we are in a G-zero world in which the US used to impose its own will on the global economy. Today it is under geopolitical and financial stress and the US cannot essentially impose its own will.

So the leadership now has to come out of Germany – either Germany takes the risk, the credit risk of backstopping Italy and Spain, which is a risk, but saves the eurozone. Or if Germany is not willing to do that then you have the destruction of the eurozone.

At this point the Free Democrats [in Germany] are against it and therefore [Chancellor Angela] Merkel will have to do a radical policy change: changing coalition, dumping the Free Democrats and going for a grand coalition either with the Greens and/or the Social Democrats who are willing to take a chance for Europe.

I don't know, however, whether within the CDU there are very different views. Some are more Europhile, some of them are less. It's not obvious they're going to be willing to make that political decision. That's the critical thing that has to happen. So there has to be a change in coalition in Germany to make that option viable and likely.

But there is not much time to do it. Because even if the EFSF is approved – and it's already being delayed – people the next day are going to see through it and see that there is not enough money for Italy and Spain. And we need much more money. That's going to be the key thing. We don't have much time. That's the problem.

How much time do we have left?

We have three months, through the end of the year. Given the current market pressure on Italy and Spain, the EFSF, even if it's approved, is going to run out of money. By the way, the EFSF is not even pre-funded. It has to borrow. It's going to run out of money and then you have the same problem. So markets are going to look through it and realize there is not enough money and they're going to put pressure on Italy and Spain, even if tomorrow the EFSF is approved.

The markets today are telling Italy and Spain we need fiscal austerity and Italy and Spain are doing more of it. Tomorrow, once they do it, there will be an even more severe recession in the eurozone and in Italy and Spain. People are going to say 'fine, you're doing the fiscal budget reduction but now you're spinning into a recession.'

So you're not going to be debt sustainable because you've got no growth. So unless we have a strategy to restore growth in the eurozone in the short run, there needs to be monetary policy easing on a massive scale: weakening of the euro, fiscal stimulus by Germany and the core, backstopping Italy and Spain and doing anything else in terms of infrastructure spending to boost the growth of the periphery that's now spinning into a recession.

Unless all these things happen it's not going to be sustainable. So liquidity support is not enough. You need to restore growth not three years from now, not five years from now through structural reforms, you've got to do it today. Otherwise it's not going to be sustainable. And the eurozone now is spinning into a recession again.

The signs from policymakers are not encouraging. Germany's finance minister was reported to have said that the G20 was largely in agreement that a fiscal stimulus is simply not needed now. What do you make of that?

That's nonsense. The IMF has it right. [IMF managing director] Christine Lagarde has it right. If everybody does fiscal austerity at a time when private demand is falling again you're going to have another global depression. We're going to make exactly the same mistake like during the Great Depression, when we took away the fiscal stimulus too soon. That is a huge risk right now.

Where does this all lead us? The risk in your view is of another Great Depression. But even respectable European politicians are talking not just an economic depression but possibly even worse consequences over the next decade or so. Bearing European history in mind, where does this take us?

In the 1930s, because we made a major policy mistake, we went through financial instability, defaults, currency devaluations, printing money, capital controls, trade wars, populism, a bunch of radical, populist, aggressive regimes coming to power from Germany to Italy to Spain to Japan, and then we ended up with World War II.

Now I'm not predicting World War III but seriously, if there was a global financial crisis after the first one, then we go into depression: the political and social instability in Europe and other advanced economies is going to become extremely severe. And that's something we have to worry about.

What about the countries in the world with relatively healthy balance sheets? What about the large emerging nations? What should their response be this time? What can China do at this time?

China has to change radically its growth model because it's not sustainable. They talk about increasing consumption, but consumption as a share of GDP has fallen from 50% to 40% to 35%, now it's 33%. And fixed investment has gone from 30% to 40% and now 50% of GDP.

China is going to have in two years its own hard landing. There's so much overcapacity, from real estate to infrastructure to manufacturing that unless they change their growth model to rely more on consumption and less on fixed investment, eventually there will be a hard landing in China. So it's not any more an issue of net exports.

They have reacted to the collapse of their net exports by boosting fixed investment rather than consumption. So they have to radically change their growth model and the sooner they do it the better for them and for the global economy.

Where does that leave China with respect to either a willingness or capacity to react with similar vigour to today's crisis as they did in 2008?

Well, if there is a recession in the G3, China is going to do more monetary, fiscal and credit stimulus. They're going to kick the can down the road for another year because in a year from now they're going to change their own leadership. But that creates even more imbalances because the only thing they know to do is more infrastructure, more real estate, more manufacturing and industrial capacity by the SOEs (state-owned enterprises). So they make the investment bubble even worse and the hard landing is going to be even worse down the line. What they need is radical policies that lead them to save less and consume more. But it will take them 10, 20 years of policy changes to achieve that. I fear they're not going to do it in time.

G20 leaders are telling us that they simply need to keep markets calm until the EFSF is agreed in mid-October. Are they deluding themselves? If we don't get a meaningful statement this weekend what are we likely to see in the markets next week?

The uncertainty, the volatility, the risk aversion is rising. I fear they're not going to reach an agreement along the lines of what I've proposed and therefore there will be more turmoil, more uncertainty, more volatility, more risk aversion. And even approving the EFSF in the current format is not going to be enough. So if it's approved people are going to say 'hey it's not enough money.' Two, there's fiscal austerity but there is no growth. So Italy and Spain are toast unless we have triple or quadruple the amount of official resources to backstop them. So, much more needs to be done and I fear the G20 are not going to say anything meaningful in this regard.

Roubini: Cut the payroll tax

Conservatives are out there pushing the idea that what our economy needs is a lot more cash in companies' hands, therefore we should cut their taxes, and then firms will start hiring again. But as Roubini pointed out, many larger companies already "have built up huge cash reserves," and so "we need to subsidize the demand for labor -- achieving job creation -- rather than making it cheaper to buy capital, as investment and other tax credits would do."

What America needs is a payroll tax cut

By Nouriel Roubini

September 17, 2010 | Washington Post

Nearly three years since the onset of the financial crisis, the continued weakness of the labor and real estate markets, U.S. consumers' unbalanced balance sheets and fading support from policy stimulus have transformed the risk of a double-dip recession from unlikely to about a 40 percent likelihood. The government responded creatively and massively to the near collapse of the U.S. financial system: The Troubled Assets Relief Program, stimulus spending and near-zero interest rates for nearly two years prevented a second Great Depression.

But the Federal Reserve has little ammunition left to boost growth or fend off a slump. And the federal deficit has reached such levels that additional spending of the kind that helped kindle the mini-recovery of early 2010 looks unwise.

In the midst of an election with crucial implications for its ability to govern, can the Obama administration reduce the likelihood of a "double dip"?

The administration knows that it needs to fashion a revenue-neutral fiscal stimulus that increases labor demand and consumption. Its proposal to make permanent a research and development tax credit that dates to the 1980s, and then to enact a temporary investment tax credit allowing firms to write down capital investments at 100 percent of cost, are welcome -- but too modest a cure for what ails the economy.

A much better option is for the administration to reduce the payroll tax for two years. The reduced labor costs would lead employers to hire more; for employees, the increased take-home pay would boost much-needed economic consumption and advance the still-crucial process of deleveraging households (paying down credit card debt and other legacies of the easy-credit years).

Most policy approaches, including the Obama proposals, have tended to subsidize the demand for capital rather than the demand for labor. That has the problem backward. In the second quarter, capital spending reached an annual growth rate of 25 percent. The argument that increased demand for capital leads to greater demand for labor (i.e., if you buy more machines you need workers to run them) has not held up. Firms are investing in capital goods, equipment and offshore offices that allow them to produce the same amount of goods with less -- and lower labor costs. To avoid a chronic increase in the unemployment rate, we need to subsidize the demand for labor -- achieving job creation -- rather than making it cheaper to buy capital, as investment and other tax credits would do.

President Obama could fully fund the reduction in payroll tax by allowing the Bush tax cuts for people making more than $250,000 a year to expire. Meanwhile, the Bush-era cuts affecting middle- and low-income earners -- the vast majority of Americans -- would remain in place for the time being.

After two years, when U.S. growth is more robust and the pace of private-sector hiring has picked up, we can afford to phase out the payroll tax cut while maintaining the income tax rates for the rich. It's possible also that we could increase the tax burden on the middle class over time to reduce our budget deficit.

Proportion is critical in designing the payroll tax cuts. Small and medium-size enterprises have had it rough the past three years. They are scrambling for operating capital as banks hold reserves tightly, and they face higher borrowing costs than large corporations when they do find willing lenders. To maximize the incentives for private-sector hiring, there should be sharper reductions to the payroll taxes paid by employers than for those paid by employees. This will counter the argument that the higher income taxes funding these payroll tax cuts will hurt the wealthy and small businesses (many of which are run by those same high-income individuals) and their willingness to hire. Moreover, any cut in the payroll tax reduces the costs of operation and labor for all businesses. Other targeted policies that induce smaller banks to lend to small and medium-size businesses may be needed.

Low-income workers have historically shown a much higher propensity to consume when given extra money, so the payroll tax cut should be designed to provide a larger-percentage break to those on the low end of the income scale compared with the upper middle class.

Payroll tax cuts for the majority of low- and middle-income Americans could be just the beginning. The administration could propose even deeper cuts in payroll taxes if the president could get Congress to accede to a partial expiration of the other 2001 and 2003 tax cuts. At the end of this year, marginal cuts in capital gains, dividends and estate taxes are all up for renewal. A partial expiration of those special reductions -- more likely to hit higher-income individuals -- would not have to raise rates to the levels that preceded the Bush tax cuts; it could also incentivize those companies that have built up huge cash reserves (in effect, overinvesting in capital at the expense of hiring) to increase their demand for labor.

These temporary changes could not realistically be promoted as deficit-reduction measures. But they would hold the line against additional government debt while the nation awaits the recommendations of the president's bipartisan panel on deficit reduction. Absent a new stimulus package -- which appears highly unlikely at this point -- these cuts direct billions in cash back into precisely those American households most likely to spend it and those businesses most likely to apply it to hiring. A tiny percentage of the highest-income Americans will pay more for the service the government rendered to their brokerage firms and investment banks in 2008. In exchange, a large tax break can be fashioned for employers and employees that jump-starts consumption, encourages hiring and thereby reduces the risk of a double dip without busting the budget.

Nouriel Roubini, chairman of Roubini Global Economics and a professor at New York University's Stern School of Business, is the author of "Crisis Economics: A Crash Course in the Future of Finance."

Roubini: Demise of dollar's dominance

Here's red meat for all you rabid anti-stimulus folks. Have at it!

The Almighty Renminbi?
By Nouriel Roubini
May 13, 2009 | New York Times

THE 19th century was dominated by the British Empire, the 20th century by the United States. We may now be entering the Asian century, dominated by a rising China and its currency. While the dollar's status as the major reserve currency will not vanish overnight, we can no longer take it for granted. Sooner than we think, the dollar may be challenged by other currencies, most likely the Chinese renminbi. This would have serious costs for America, as our ability to finance our budget and trade deficits cheaply would disappear.

Traditionally, empires that hold the global reserve currency are also net foreign creditors and net lenders. The British Empire declined — and the pound lost its status as the main global reserve currency — when Britain became a net debtor and a net borrower in World War II. Today, the United States is in a similar position. It is running huge budget and trade deficits, and is relying on the kindness of restless foreign creditors who are starting to feel uneasy about accumulating even more dollar assets. The resulting downfall of the dollar may be only a matter of time.

But what could replace it? The British pound, the Japanese yen and the Swiss franc remain minor reserve currencies, as those countries are not major powers. Gold is still a barbaric relic whose value rises only when inflation is high. The euro is hobbled by concerns about the long-term viability of the European Monetary Union. That leaves the renminbi.

China is a creditor country with large current account surpluses, a small budget deficit, much lower public debt as a share of G.D.P. than the United States, and solid growth. And it is already taking steps toward challenging the supremacy of the dollar. Beijing has called for a new international reserve currency in the form of the International Monetary Fund's special drawing rights (a basket of dollars, euros, pounds and yen). China will soon want to see its own currency included in the basket, as well as the renminbi used as a means of payment in bilateral trade.

At the moment, though, the renminbi is far from ready to achieve reserve currency status. China would first have to ease restrictions on money entering and leaving the country, make its currency fully convertible for such transactions, continue its domestic financial reforms and make its bond markets more liquid. It would take a long time for the renminbi to become a reserve currency, but it could happen. China has already flexed its muscle by setting up currency swaps with several countries (including Argentina, Belarus and Indonesia) and by letting institutions in Hong Kong issue bonds denominated in renminbi, a first step toward creating a deep domestic and international market for its currency.

If China and other countries were to diversify their reserve holdings away from the dollar — and they eventually will — the United States would suffer. We have reaped significant financial benefits from having the dollar as the reserve currency. In particular, the strong market for the dollar allows Americans to borrow at better rates. We have thus been able to finance larger deficits for longer and at lower interest rates, as foreign demand has kept Treasury yields low. We have been able to issue debt in our own currency rather than a foreign one, thus shifting the losses of a fall in the value of the dollar to our creditors. Having commodities priced in dollars has also meant that a fall in the dollar's value doesn't lead to a rise in the price of imports.

Now, imagine a world in which China could borrow and lend internationally in its own currency. The renminbi, rather than the dollar, could eventually become a means of payment in trade and a unit of account in pricing imports and exports, as well as a store of value for wealth by international investors. Americans would pay the price. We would have to shell out more for imported goods, and interest rates on both private and public debt would rise. The higher private cost of borrowing could lead to weaker consumption and investment, and slower growth.

This decline of the dollar might take more than a decade, but it could happen even sooner if we do not get our financial house in order. The United States must rein in spending and borrowing, and pursue growth that is not based on asset and credit bubbles. For the last two decades America has been spending more than its income, increasing its foreign liabilities and amassing debts that have become unsustainable. A system where the dollar was the major global currency allowed us to prolong reckless borrowing.

Now that the dollar's position is no longer so secure, we need to shift our priorities. This will entail investing in our crumbling infrastructure, alternative and renewable resources and productive human capital — rather than in unnecessary housing and toxic financial innovation. This will be the only way to slow down the decline of the dollar, and sustain our influence in global affairs.

Nouriel Roubini is a professor of economics at the New York University Stern School of Business and the chairman of an economic consulting firm.

Roubini & Taleb bitch slap CNBC cheerleaders

It's pathetic how hard CNBC tries to spin Roubini and Taleb's statements, and how hard they look for "glimmerings of hope."

One of the bubbly newsbabes even posited that since people are finally desperate enough to listen to Roubini and Taleb, that the market must have finally hit bottom.  (Meaning, it's going to start going up).  Taleb would have nothing of it.  He said the system needs to be completely changed, change our culture, and live with less debt.  And most important, Taleb said banks need to change their incentive systems, which encourage bankers to take on hidden risk in pursuit of short-term bonuses:  "Wall Street can no longer operate like before."  And: "Those who one day may need to be bailed out need to be nationalized now."  The CNBC panel, which is used to kissing Wall Street's behind, was going nuts.

Roubini also favors government nationalizing the insolvent banks and then re-selling them.  He said, "Cash is king," and he's not invested in the market.  "We need more sustainable [economic] growth based on real investment in human and physical capital," not an economy based on unproductive housing or dot-com bubbles.


Nouriel Roubini and Nassim Taleb Spreading Doom & Gloom on CNBC
February 9, 2009 | CNBC

URL: http://www.cnbc.com/id/15840232?video=1027496846&play=1.