Global Economic Crisis

It appears that the ECB is abandoning its policy of monetary prudence, and imitating U.S. Fed Chairman Ben Bernanke in running its printing press wildly. Mario Draghi, ECB boss, has made available cheap loans to European banks experiencing liquidity problems. In response, more than 500 European banks stampeded to the ECB discount window, and have borrowed nearly 490 billion euros, equivalent to $643 billion USD at current exchange rates. Clearly, the European banks had desperate need for new capital, while the Eurozone politicos hope the banks will use the newly minted euros to buy European sovereign debt.

Nouriel Roubini I think described this rather nicely as in essence quantitative easing and stealth debt monetization. As with Ben Bernanke’s repeated bouts of money printing, I don’t think this new loose monetary policy by Mario Draghi will avail itself of any meaningful results. Since the global financial and economic crisis was unleashed in 2008, money printing by central banks has been a symptom of the problem, not its solution.

WALL STREET POLICE: GLOBAL ECONOMIC CRISIS

Officer Larry of the NYPD is on his way to Zuccotti Park in lower Manhattan to arrest peaceful protesters involved with the Occupy Wall Street movement. Being a public spirited member of the New York Police Department, Officer Larry does remind us that there is a global economic crisis underway that rivals the Great Depression of the 1930s.

Once again, as they have already done countless times before since the emergence of the European sovereign debt crisis, the 27 political head honchos of the European Union have once again boasted that they have saved the global economy from collapse with finally, the real definitive cure for the crisis. However, the only thing really distinct with this latest version of the EU cure is that the numbers are much larger. The politicos claim that they have received agreement from impacted banks to  write off 50 percent of the value of outstanding loans to Greece. Banks in turn will receive recapitalization from the EU. And perhaps most striking in terms of attempting to win investor confidence, the value of the EFSF, or Eurozone bailout fund, will expand from just over $400 billion to around $ 1.4 trillion. No wonder the European politicians are patting themselves on the back, while predictably stock exchanges across the globe are rallying to new, dizzying heights.

So, should we believe that this time, after so many failed attempts also advertised as the real solution, the politicians have finally got it right? I don’t think so. The massive write-down of Greek debt will jeopardize the financial solvency of many European banks, requiring massive recapitalization. That is supposedly why the European Financial Stability Facility is being expanded to a level of one trillion euros. But where will the Europeans get this money? From the same banks they will need to bail out? From investors already spooked by a 50 percent write-down on Greek debt? From China?  From already over-leveraged German taxpayers? In the meantime, the other PIIGS nations are on the brink of insolvency (Portugal, Italy, Ireland and Spain), not to mention fragile eastern European economies, which nobody in the EU will even discuss. No wonder the agreement announced in  Brussels is lacking in specific details.

Nouriel Roubini  tweeted this morning, “Little in EZ plan to restore growth/competitiveness. Without it financial schemes (greek haircut, bank recap, levered EFSF) alone will fail.” Professor Roubini has had a far more reliable track record in predicting the trajectory of the global economic crisis then all the 27 EU political leaders and their army of economic and financial advisors combined. The fact that Nouriel Roubini is already predicting that the EU’s latest bailout plan will fail is far more significant, in my view, then all the stock market rallies being fed by the latest self-congratulatory propaganda coming out of Brussels.

WALL STREET POLICE: GLOBAL ECONOMIC CRISIS

Officer Larry of the NYPD is on his way to Zuccotti Park in lower Manhattan to arrest peaceful protesters involved with the Occupy Wall Street movement. Being a public spirited member of the New York Police Department, Officer Larry does remind us that there is a global economic crisis underway that rivals the Great Depression of the 1930s.

It is no longer a small group of prognosticators (including this blog) who are expressing grim thoughts on the trajectory of the global economic crisis. More and more, respected authorities on global finance and economics are weighing in with their dire predictions. Nouriel Roubini openly asks the question,  “Is Capitalism Doomed?”  Pimco’s Mohamed El-Erian indicates that the bond markets are pricing in a double-dip recession. Equities trading in bourses throughout the world are experiencing levels of volatility not seen since the onset of the crisis in the summer and fall of 2008.

It is now just a remnant of pundits who still believe that the global economy “recovered” after the reckless expansion of sovereign debt following the collapse of Lehman Brothers. These proverbial neo-Keynesian optimists have chosen to shut their eyes and cover their ears. But others who can sense what is happening in advanced and major developing economies know that we are in the midst of  something that does not have a positve ending.

In a piece for Al Jazeera entitled “black swan events and the global economy,” NYU economics professor Nouriel Roubini, the “doctor of doom,” has presented a new dark perspective on the current state of global economics. Roubini integrates a number of negative economic metrics and phenomena, including “black swan” events such as the Japanese earthquake and more mundane though far from rosy economic data that challenges the views of economists who are eternally optimistic. While the optimists believe the current negative economic factors are merely hiccups, and equity growth can resume in full force, Roubini warns that the dangers confronting the global economy are chronic, and may lead to a double-dip recession.

On the current Greek debt crisis, Roubini writes, “Global risk-aversion has also increased, as the option of further ‘extend and pretend’ or ‘delay and pray’ on Greece is becoming less desirable, and the specter of a disorderly workout is becoming more likely.”

One of the points Nouriel Roubini makes in his article is that  new financial and economic disasters on the scale of 2008 and would leave policymakers empty-handed, as the massive growth in public debt since 2008 leaves them without ammunition in the event of a new series of catastrophes. As Roubini puts it:

“This lack of policy bullets is reflected in most advanced economies’ embrace of some form of austerity, in order to avoid a fiscal train wreck down the line. Public debt is already high, and many sovereigns are near distress, so governments’ ability to backstop their banks via more bailouts, guarantees, and ring-fencing of questionable assets is severely constrained. Another round of so-called ‘quantitative easing’ by monetary authorities may not occur as inflation is rising – albeit slowly – in most advanced economies.”

In essence, Roubini offers a portrayal of the current state of the global economy that is laden with doom and gloom.

In a recent interview with Bloomberg TV, Dr. Nouriel Roubini, one of the foremost economists monitoring the global financial and economic crisis, warns of  grave dangers facing the public budgetary imbalance of the United States. “The fiscal problem is very serious. The bond vigilantes have not yet woken up in the U.S. in the way they have in the Eurozone. Unless the U.S. addresses this fiscal problem, we’re going to see a train wreck.”

Roubini in the past has supported the vast budget deficits of governments and monetary loosening of central banks as a painful but necessary measure by advanced economies to redress the damage resulting form the financial and economic collapse of 2008. Even then, he warned that there was no free lunch, and that policymakers would have to present a credible plan for withdrawing stimulus and monetary easing and curtailing their levels of public debt. Now, with a full-fledged sovereign debt crisis raging in Europe and the U.S. trapped with a structural mega-deficit, Roubini and other perceptive economists are clearly worried about the unsustainable budgetary imbalance of the U.S. federal government. Indeed, a day of reckoning is coming closer, with no cogent remedies on the horizon. It is becoming far more likely that a fiscal train wreck is a future destination for the U.S. economy, and that future may not be long delayed.

Three days after the Democratic Party lost control over the U.S. House of Representatives in the midterm election, the Obama administration heralded a supposedly impressive jobs report. According to the Bureau of Labor Statistics, the U.S. economy created a net total of 150,00 jobs during October. Sounds good. However, the unemployment rate stood at 9.6 percent, suggesting that previously discouraged workers reentered the job market.

Now here is where things get really strange. According to Nouriel Roubini, there is something contradictory about the claim of strong job creation in October. Here is what he tweeted: “Household survey: employment fell 330K last month & labor force participation rate at 25yr low. How does that square with 150K jobs gain?”

If Professor Nouriel Roubini is skeptical about the laudatory jobs report just released, we all should be.

NYU Economics Professor Nouriel Roubini believes that the risk of a double dip recession is growing in the United States. He assesses the  probability of a double dip at 40%, the other scenario being subpar economic growth (under one percent), which feels like a recession in terms of high unemployment, growing public deficits, declining home values and increased losses among banks and financial institutions.

“You don’t need negative economic growth to feel like a recession  when growth is well below trend growth,” Roubini said in a recent Financial Times interview. Even if a double dip is technically avoided in the last quarter of 2010, Nouriel Roubini’s forecast for 2011 is dire. He sees the risk of a double dip recession increasing, along with widening credit spreads and interbank lending rates. Compounding his gloomy projection, Roubini sees little left for policymakers to grapple with, either on the monetary or fiscal side. In particular, he sees another flurry of quantitative easing by the U.S. Federal Reserve as being “impotent.”

The downbeat perspective of Roubini on the U.S. economy extends to Europe, where he believes the recent impressive growth figures in Germany are merely temporary. Furthermore, he points out, Germany is the best performing economy in the Eurozone, where the remaining countries are facing disaster. Half of the Eurozone is already experiencing a double dip recession. In addition, Japan is courting a double dip, and even strong emerging economies such as China are showing signs of an economic slowdown.

Overall, I have not seen Professor Roubini so gloomy on the state of the global economy since his prescient warnings of  financial Armageddon approaching in the months leading up to the implosion of the investment banks in the summer and fall of 2008.

In an interview with CNBC, the renowned NYU economics professor Nouriel Roubini reverted to his apocalyptic mantle of “Dr. Doom.” He said without equivocation that equities were likely to lose 20% of their current valuation. He pointed out that the Eurozone debt crisis and general weakness in the global economy will create severe challenges for investors.

Regarding the Greek sovereign debt crisis, Roubini described efforts to bail out Athens and other highly indebted Eurozone countries as “mission impossible.” He went on to provide a dire overview of the fiscal crisis gripping many advanced economies.

“What needs to be done is clear. We need to raise taxes and cut spending. Otherwise we’re going to get a fiscal train wreck,” warned Roubini. Readers of my book, “Global Economic Forecast 2010-2015: Recession Into Depression” are aware that my own projection is that the growing sovereign debt problem will mark the next phase of the global economic crisis, sparking a synchronized global depression.

During a panel discussion conducted by the Milken Institute on the Greek debt crisis, as well as in comments to the media, Professor Nouriel Roubini relayed a stark assessment on the situation. His assessment of the planned bailout of Greece by the International Monetary Fund and the Eurozone nations, especially (if reluctantly) Germany, was damning. The bailout will not work, Roubini emphasized, as the problem confronting Greece was not one of illiquidity but rather the far more dire circumstance of insolvency.

Roubini made several references to Argentina’s fiscal crisis at the turn of the current century, which culminated in default on the national debt because of egregious errors made by policymakers. The failure of policymakers in the Eurozone to recognize that Greece is insolvent and requires debt restructuring, rather than a bailout in the hope of calming markets, will make a bad situation far worse, and waste an enormous amount of public money.

“Greece is just the tip of the iceberg, or the canary in the coal mine for a much broader range of fiscal problems,” said Roubini. The disorderly debt default of Greece would spread contagion throughout other highly leveraged economies in the Eurozone, he warned.

In a recent edition of the Australian newspaper, The Sydney Morning Herald, business blogger  James Adonis presented the views of seven financial thinkers on what the next stage of the global economic and financial crisis might entail. Not surprisingly, there were optimists in the group. There were also pessimists, including your’s truly. Here is what I told James Adonis, and appeared in The Sydney Morning Herald:

“But Canadian economic commentator, Sheldon Filger, disagrees. He predicted the global financial crisis two years before it occurred. ‘Policymakers in major advanced economies have made a gamble; absorbing massive levels of public debt to backstop insolvent banks and fund stimulus spending… They will lose this gamble, I am convinced, sparking a massive sovereign debt crisis in these economies, especially the US and UK, unleashing a synchronised global depression. What is unfolding now in Greece and the other PIIGS is but a harbinger of what is to come. I predict that round two will unfold by 2012.’ ”

In the months prior to the worsening financial situation in the United States combusting in 2008, there were plenty of prognosticators. The closer one got to official government circles and mainstream media, the more upbeat and positive the forecasts became. It was in the area of unofficial sources where one encountered the most accurate prediction of what was to unfold. I recall how NYU professor Nouriel Roubini came out with a checklist of what would unfold months  before the collapse of America’s major investment banks. He was pilloried as “Dr. Doom,” while those who abstained from drinking the official Kool-Aid  marked off his checklist with an uncanny lack of interruption, as the global financial system headed towards catastrophe.

My views, as expressed in The Sydney Morning Herald and elaborated on in detail in my book, “Global Economic Forecast 2010-2015: Recession Into Depression,” are presently far from the perspective of officialdom, policymakers and mainstream media pundits. Yet, as major economies sink deeper into irreversible public debt, and sovereign debt crises have emerged in Greece and Dubai, I have begun to mark off my own checklist, as the global economy  accelerates on the road to fiscal calamity.