Nouriel Roubini's Global EconoMonitor

Sagging Global Growth Requires Us to Act

From the Financial Times:

Sagging Global Growth Requires Us to Act

By Nouriel Roubini and Ian Bremmer

It looks as if the global economy is heading for a serious slowdown this year. Emergency austerity programmes in some countries will put a drag on growth. Inventory adjustments will run their course. The effects of tax policies that steal demand from the future – such as the US “cash for clunkers” scheme, tax credits for home buyers or cash for green appliances – will fizzle out. Labour market conditions will remain weak. The slow and painful deleveraging of balance sheets and income-challenged households, financial institutions and governments will continue.

The result is governments and consumers that spent too much and now need to deleverage – in the US, Britain, Spain, Greece and elsewhere – will spend, consume and import less. But those governments and consumers that saved too much – in China, emerging Asia, Germany and Japan – are not spending more. In a world of excess supply, the recovery of global aggregate demand will be weak, pushing global growth much lower.

The most realistic scenario for global growth is painful, even if we avoid a double dip. In the US, 1.5 per cent growth in the second half of this year and into 2011 will feel like a recession, given a probable further rise in unemployment, larger budget deficits, a further fall in home prices, larger losses by banks on mortgages and loans, and the risk that a protectionist surge will further damage relations with China.

In the eurozone, growth will be closer to zero by the end of this year, as fiscal austerity and stock market corrections, along with rises in sovereign, corporate and interbank liquidity spreads, take their toll. Increases in volatility and sovereign debt risk will also undermine business and consumer confidence in ways that move beyond Europe.

Those hoping that China can keep the global economy afloat are likely to be disappointed. The world’s leading growth engine in recent years is slowing, from 11 per cent-plus towards a 7 per cent rate by year’s end. That will damage China’s exporters, while spelling bad news for export-growth in the rest of Asia, which increasingly relies on Chinese imports too.

Politically, this second global slowdown could not have come at a more difficult time. In the US, Democrats and Republicans will soon retreat to their corners to prepare for November’s mid-term elections. Meanwhile, President Barack Obama must again persuade America’s taxpayers that a new surge in government spending is needed to protect a fragile recovery – and at a moment when voters are telling pollsters that America’s debt is as great a threat as terrorism.

So the president must also tell voters that the longer-term solution to America’s economic insecurity involves both austerity and sacrifice. But abroad he faces an even larger problem. Mr Obama has limited leverage with the few remaining moderate Republicans, but the recent Group of 20 summit in Toronto showed him even less able to persuade European governments to shrug off fiscal worries. These countries seem unlikely to shift from their view that events of the past year in Greece, Spain and elsewhere – and fears of further crises to come – demand that the continent must learn to live within its means.

Nor should we expect much from the next G20 meeting in Seoul in November. A common fear of global meltdown provided some degree of unity at previous meetings. Yet, there is no longer international consensus on where tomorrow’s true dangers lie. Differing assumptions within the group over the proper role of government in a domestic economy make agreement on the details involving anything of substance very difficult.

Mr Obama’s critics often deride him as a man whose talents are limited to his fine speeches. Yet even if that were true, words matter. Plans to boost government spending in the near term, and to embrace austerity in the longer term, will only become more difficult if the president fails to explain the need for them. For their part, America’s Republicans need to accept that the path to a global recovery begins at home, with extended unemployment insurance and help for state and local governments.

Countries that save too much must also do their part for global demand. In particular, the Chinese leadership should recognise that failure to allow a more substantive revaluation of its currency will have serious consequences at home. It makes little sense to try to boost China’s local exporters while undermining the longer-term health of their best customers. Beijing must also move much more quickly to boost China’s domestic consumption.

The eurozone needs fiscal austerity, but it also needs a level of growth best provided by an easing of monetary policy from the European Central Bank. Early debt-restructuring of insolvent members should also be on the agenda. Germany should postpone its fiscal consolidation for a couple of years to boost disposable income and consumption. Outside Europe, Japan must accelerate economic reforms.

These steps will take time. Even if all are undertaken properly, global growth will recover only slowly. But if they are not undertaken at all, the risk of a global double dip, and a new financial crisis, will grow sharply. Policymakers cannot keep kicking the can down the road for much longer.

Ian Bremmer is the president of Eurasia Group and author of The End of the Free Market. Nouriel Roubini is professor of economics at the Stern School at New York University, chairman of Roubini Global Economics and co-author of Crisis Economics.

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12 Responses to “Sagging Global Growth Requires Us to Act”

GuestJuly 12th, 2010 at 9:58 pm

Dear Mr. Bremmer and Professor Roubini,Your ideas sound good, once again, but I don’t think they will be put into practice, as you have anticipated in this article.Can you please suggest what the common people should do at their individual and societal level, instead of waiting for the governments to act?

economicminorJuly 13th, 2010 at 10:05 am

All the Stimulus has done so far is “kick the can down the road”. There is a limit to debt, especially debt used for consumption. Housing is consumption, paying for soldiers, police, fire departments, city planners, and a good part of government is consumption. Food stamps, unemployment subsidies, Medicare are all consumptive activities.Debt has to be serviced. Even at low interest rates, there is a cost to other productive endeavors.I really wish the Professor would study Steve Keen’s work or Chris Martenson’s as the Professor has a brilliant mind. He just isn’t seeing the entire picture.We have surpassed the point of sustainability. All we have been doing for two years now is shifting private debt to the public. All while Main Street continues to deflate. In the end, it is the same problem. The servicing costs exceed the country’s real income. That is why the deficits grow ever larger. So what do we do next? Sell off our National Parks? Sell off our roads to the banks so they can turn them into toll roads? Sell of the remaining resources? Sell the politicians? Oh! We did that already!The first guest asked what the common people should do. They should educate themselves financially and politically so that they quit falling for stupid circular logic fed to them by those who wish to control them. Google the names listed above and read and watch the videos that are provided. If they don’t convince you that the system is under going a major adjustment, read Minsky and Hayek and Mises. There is no such thing as perpetual motion on earth and no such thing as a free lunch.Debt is borrowing from future demand but it has a cost of set up fees and interest, plus it has to be paid back. So unless debt is used to increase productive endeavors, thus generating the income to service itself, then the cost of debt is accumulative and there becomes a point when income from all sources is inadequate to service existing debt and then even income must be borrowed.. At that point, there is no way to ever catch up. The eventual outcome is default.. Austerity and restructuring may help if done early enough but the much of the world has exceeded this point IMO. Leaving us with default and deflating values until a new balance is achieved at a much lower level of debt.I am afraid that with the insane programs of our government, we are eventually going to see a sovereign debt collapse of the USA. They have bailed out their benefactors (the parasites) at the expense of the host (our sovereignty). Time will tell but at a minimum, they have insured that our standard of living will decline for a long long time. That means that the next generation’s prospects are much diminished as will be their comfort and freedom.You should get out from under your debts, any way you can.. Pay them off it you can. If not default, walk away, bankruptcy or what ever works. A debt free individual is a free individual. Then you should start setting aside what you will need to endure the next decade of decline. Make choice for your benefit, no one else’s. Your choice to believe that more debt can solve a debt crisis or not. I chose not to believe.You might want to move where there is adequate water and a decent climate so that they can grow some of your own food. Maybe you just want to hunker down where you are. Your personal decisions today will affect your comfort for years to come. Some one has to pay to service the trillion$ in debt being written up. How will you do that if you are still over your head in existing debt? You will pay, either thru actual taxes or thru the tax of inflating costs and diminished incomes.And IMO, neither party offers any hope for the future and the “Tea Party” is so far has no intelligence, logic nor common sense. So the next few years will be of chaos with no leadership. Which will be better than what we have, which is a give away of our future income to the parasites.Know that this is a cycle and the object is to live thru the downside the best you can and prepare for the eventual bottom and the long slope up again.Good luck to us all.

GuestJuly 14th, 2010 at 12:24 am

e- 7 US senators went to their “bunker” in Svalbard to deposit some chili seeds..Red hot’ chillies arrive at frozen seed vault isnt it… no SPAM??

Steven G. BrantJuly 14th, 2010 at 2:49 am

The world’s best economic thinkers suffer from a problem common to all “experts”: They are experts in their own fields only and do not see the larger sociological system in which the challenges they are dealing with exist. This is classic systems thinking I am using here. (See W. Edwards Deming, Peter Drucker, and Russell Ackoff.)In response to the Guest who asked what the common people can do at the individual and societal level, my answer is (1) Demand that “generalists” be brought into the discussion. People with cross-disciplinary perspectives are badly needed here, because the experts are – to paraphrase Peter Drucker – making society better and better at doing the wrong things. And (2) individuals should demand that the greatest sociological development of the last half century – the breakthrough in humanity’s technical capability to “do more with less” to the point where feeding, clothing, housing, and educating every man, woman, and child on Earth is now possible – be factored into the problem-solving equation.Why do I mention point (2)? Because this technological tipping point pulls the rug out from under hundreds of years of scarcity-based, zero-sum economic thinking and the parallel “one nation must always be the top dog” global political dynamic. The reality of an economics of scarcity… of separate countries in competition with each other… being in a symbiotic “dance” with the politics of “us against them” is obsolete.And the faster the world’s economic leaders realize that they are currently driving an automobile in a world that needs them to be flying an airplane (because there is no dry land under them any more) the faster we “common people” will begin to feel that our leaders actually know what they’re doing… that they actually see the world for what it is… rather than what it once was.In my opinion, nothing could be more important than for people like Mr. Roubini and Mr. Bremmer to begin speaking of Redesigning The Global Socio-political Economic Systems (not re-starting or re-booting or anything else that’s focused on continuing to use a system whose design is obsolete).The thinking skills needed to speak about such a Redesign Effort are available in the works of Deming, Drucker, and Ackoff.. and as currently practiced by people such as Peter Senge of MIT and Roger Martin of the Rotman School of Management. But the resource I recommend most strongly is that of systems thinking pioneer and global problem-solving genius R. Buckminster Fuller. He would have been 115 on July 12th, and his landmark book “Operating Manual for Spaceship Earth” is still, in my opinion, the best primer on how the global socio-political economic system needs to be redesigned ever written.Organizations such as the Roosevelt Institute and The Economist are holding meetings in the coming weeks and months to evaluate the health of the global financial system. Unfortunately, I see little evidence that the organizers of these events realize that the global financial system’s health is a function of the design of the larger social system of which it is just one part… and that only by evaluating that larger social system’s design can we make our financial system one which works for the world of tomorrow we say we want, not the world of yesterday almost came crashing down two years ago.We are struggling to build a win-win world (see the UN’s Millennium Development Goals) and are using win-lose sub-systems in the attempt. As a result, our efforts are destined to fail. We must – as Peter Drucker said – stop getting better and better at doing the wrong things and start doing the right things, even if we do them poorly at first.

economicminorJuly 14th, 2010 at 9:30 am

I am curious as to HOW this process could begin.I can see that the systems under which we are currently operating are malfunctioning and that a new system will eventually take over. So far in history, no major change has come about with out violence. The least violent was probably with India and Gandhi.Even in Greece there are riots about resource allocations. People who have, believe they are entitled. Those who plan on being entitled, are very angry when the rug is withdrawn prior to them even getting on it.I know people who have retired early because their jobs became difficult with the New Normal or down turn and because the retirement benefits were as great or greater than working. These people believe, have faith, that the system will support them at a very comfortable standard of living for the rest of their lives. They can’t imagine that the system is so broken that they will not receive what they believe they are entitled to.What you are suggesting makes sense intellectually on one level but it also suggests that the resources will be more evenly divided and to me that suggests that some people will have to be satisfied with less. This is going to happen anyway but I can’t see any of those that I know giving up what they believe they are entitled to willingly.Also with entitlement, you have elite entitlement. Those with power never want to give up that power. We have seen that with Homeland Security trying to make the multitude of intelligence agencies work together. Turf wars are common. Competition is inbred into us as humans. Even you probably believe there is enough to go around.. Google Chris Martenson and watch the video presentation he has put together. I have seen most of these graphs before but he puts them together in a package that explains so much of what is happening and why what you suggest is not going to solve our current dilemma.Add to these human issues the physical resource limitations documented by Martenson. Most know physical resources, whether it is oil or fish in the ocean or deposits of uranium, are all past their peak of easily being obtained. Even potable water is in decline world wide.So even though the world has the technology to make everyone’s life better, there are physical and human emotional constraints.One other thing. It is impossible for economists to keep current with all data and know all reasonable theories in their field. It is impossible for all surgeons to be as up to date as the patient would like them to be. It is impossible for any professional, whether it be a professor teaching computer science or a professor teaching the theory of business models to stay current. Information is to vast and the amount is expanding exponentially.That is why what you suggest makes a lot of sense. You need non professional thinkers of all disciplines who are not locked into beliefs but HOW does this happen outside a university type of atmosphere? And what good would that do, unless you could do this on a world wide scale. We can’t even keep the USA running free from corruption and influence peddling much less get the UN to get together on any topic.What you suggest is interesting but impossible IMO. That is why you will never see it outside a think tank environment.Sorry

MorbidJuly 18th, 2010 at 5:41 am

The economic model is broken.The model that requires steady, unending growth =’s infinite growth.It’s a Ponzi scheme that is unsustainable because resources are limited. Like this I agree with the systems approach to the problem. Like this one will quickly find out that population must be limited to a sustainable level based on living in harmony with Nature and not raping it.Slowly I begin to see that it is dawning on forum members that the whole system is broke and is not coming back.Only the wealthy will not notice any speed bumps in their road. Only the wealthy will be sending chili pepper seeds to the Doomsday seed vault.Look Out Below!God help us all.

economicnminorJuly 15th, 2010 at 10:07 am

Actually, a lot of people who follow Austrian Theory or have read Minsky or even study economics and have what use to be called “common sense” know all of what CHS writes about. For those who are still trying to figure this mess out, his series about the “Con” is worth while reading.The reality is that what he is documenting are lessons in human nature and the cycles of economics. Greed, hubris, arrogance, decit and fraudulent behavior have been with humans through out history and will remain with us for our lifetimes at least.It is incredibly interesting to observe. It is also very difficult to not be affected. Unfortunately, we are all in this together.

Anonymous ibid.July 14th, 2010 at 11:44 pm

There are some flaws with the article.First, if anything, polls probably suggest that people think Obama has not done enough fiscal stimulus and that they would accept higher taxes, especially on the wealthy or budget cuts if those did not cause more unemployment. See and look at the USA Today poll showing 60% in favor of more stimulus. The CBS poll suggests a lot of interest in tax cuts, but the Pew poll doesn’t confirm it. My guess is that when people told CBS they wanted tax cuts, they meant they wanted rebate checks.Second, I’m not sure what it means that people are as scared of the deficit as of terrorism. A lot of us have figured out that terrorism was wildly hyped. Have as many figured out that the deficit is wildly hyped?The Democrats face two problems. They screwed their base in order to placate swing voters and avoid completely infuriating the Masters of the Universe who run the media machine and hand out the big campaign cash. Second, unemployment hasn’t lessened, so voters would like to punish the Democrats on the theory that if the toilet is full, one should just keep on flushing. Maybe they can remember who filled the toilet in the first place and try not to put them back on the throne.Finally, there’s no reason why we couldn’t cut the deficit and do stimulus. The big cost drivers in the budget are the military and our inefficient healthcare system. Guys like Dylan Ratigan may not have figured out that “waste, fraud, and abuse” was always a scam, but anyone who knows anything whatsoever about the budget knows that the essential functions of the federal government have been cut to the bone in order to keep up wasteful war spending and to keep the insurance and pharmaceutical industries in the chips (not to mention the money that continues to be funneled to the investment banks through Fed policy and Treasury actions).The country will figure out that Republican policies are losers in one of two ways: by remembering what happened from 2001-2009 or by repeating the class.

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