The Rising Risks of a Global L-Shaped Near Depression and Stag-Deflation
"to prevent such a financial and economic disaster the time to forcefully act is now"
Nouriel Roubini
March 2, 2009
Of the $800 billion of the US fiscal stimulus only $200 billion will be spent in 2009 with most of it being back-loaded to 2010 and later. And of this $200 half is tax cuts that will be mostly saved rather than spent as households are worried about jobs and about paying their credit card and mortgage bills (of last year’s $100 billion tax cut only 30% was spent and the rest saved). Thus, given the collapse of five out of six components of aggregate demand (consumption, residential investment, capex spending of the corporate sector, business inventories and exports) the stimulus from government spending will be puny this year.
This is indeed the worst financial crisis and economic crisis since the Great Depression and, unless policy makers all over the world start waking up rather than being asleep at the weel and start to implement Powell-style overwhelming policy force we may end-up with a multi-year near depression or stag-deflation as we have not seen since the Great Depression. This aggressive and front-loaded and pre-emptive policy response needs to include:
· massive and more unorthodox monetary policy easing to defrost credit markets even if this may imply central banks widening collateral and taking greater credit risk;
· massive and front-loaded fiscal stimulus more on the spending than tax side and with income relief to agents with high marginal propensity to spend (poor, unemployed, state/local governments);
· rapid takeover of insolvent banks – full nationalization - and their quick clean-up and re-privatization;
· aggressive credit growth incentive for banks and financial institutions to stop the collective action coordination problem leading them to contract credit to even creditworthy households and firms;
· use of proper and constructive credit forbearance (on capital adequacy ratios, on mark-to-market marks, on rating agencies destructive lagged downgrades);
· Across the board reduction of the face/principal value of mortgage debt and other consumer debt for insolvent households as a case-by-case debt re-stretching of debt will not work;
· Immediate doubling of the IMF resources and provision of loans/liquidity to emerging markets under liquidity and financial stress (with conditionality for those economies with severe macro/financial/policy weaknesses; with very light conditionality for the emerging markets with sounder fundamentals).
Thus, to prevent such a financial and economic disaster the time to forcefully act is now; policy makers in Europe, Japan, other economies and even in the US and China are falling behind the curve and time is not running in their favor. The current delayed reaction to worsening financial and economic conditions rather than pre-emptive forceful action to prevent such conditions from materializing would ensure that the bad equilibrium of a global near depression will occur.
Please read the complete article at:
http://www.rgemonitor.com/roubini-monitor/255816/the_rising_risks_of_a_global_l-shaped_near_depression_and_stag-deflation