Markit Magazine Q&A with Nouriel Roubini: Crisis? Which Crisis?
Markit Magazine: Crisis? Which Crisis?
Nouriel Roubini, the US economist, believes quantitative easing is a necessary evil and that crises are becoming more frequent and damaging.
Q: Since the start of the global credit crisis, governments around the world have injected an unprecedented amount of liquidity into the global economy. The initial experience of quantitative easing suggests that the increase in liquidity is positive for risky assets. However, the impact on the real economy is less clear. Do you think it has been effective in stimulating growth or should the Federal Reserve be taking another approach?
A: Economic growth in the US and most developed economies is anaemic and below expectations. Measures of inflation, both core and headline, are below the implicit and explicit targets of the Federal Reserve. The scenario is low growth, low inflation and an unemployment rate close to 10 per cent. If one were to run the numbers, you get that the Fed Funds rate (FFR) should be around minus 5 percent, but nominal policy rates have a zero lower bound. Quantitative easing (QE) by the US and other governments has been increasing liquidity to effectively push the real policy rate below zero. Some $600bn of additional liquidity in QE2 is the equivalent of a reduction of about 50-60 basis points in the FFR. When Ben Bernanke says this is just a variant of traditional monetary policy, I think that is correct, even if unconventional.
I think recent opposition to QE2, especially those that have said it is a disaster, is totally wrong. Given the high risk of a double dip recession, ask yourself where would the economy and risky asset prices be today if this had not been done. Asset price reaction had already priced in QE2 from Bernanke’s speech in Jackson Hole well ahead of the actual implementation. The stock market is about 10 per cent higher.
Roubini Global Economics wrote a paper concluding that another round of QE was appropriate; we even got the $600bn estimate correct a couple of weeks before the announcement. Unfortunately, the real economic effects of this move are going to be modest at best. QE2 should push industrial output next year from the baseline by only about 0.2-0.3 per cent. We believe that potential growth should be about 3 per cent and the baseline is 2 per cent. We also believe that 2.2-2.3 per cent growth is still below potential and thus there will still be deflationary pressure.
2 Responses to “Markit Magazine Q&A with Nouriel Roubini: Crisis? Which Crisis?”
People who don’t have to shop for groceries or pay their own bills have a warped perception of the cost of living. It is easy to quote the government stats on inflation, it is another thing to have rising prices of what we need eating a hole in your income.QE and tax reductions that are targeted at creating inflation will neither be beneficial nor painless for the producers or the general public in the long run.I wouldn’t say QE is a disaster, but it is harmful in the big picture unless it was targeted which it hasn’t been. You can claim that QE prevented a depression but I believe all it did was kick the can down the road. That may be good enough for you but when the next leg down happens, it will put this country on its knees. At some point, if not already, interest rates will rise to compensate for the real risk and the devaluation of purchasing power. With so much debt short term, watch out when the bills start coming due.For as far as I know, there is no such thing as perpetual motion in a system of gravity and atmosphere and there is no free lunch. Someone has to pay or the restaurant goes out of business. QE is just an attempt to get someone else to pay for lunch without asking them…Or taxation without representation..
Don’t worry, the bond vigilantes, now put in a quantitatively easy sleep, will have a rude awakening and they will do their job…Unfortunately, by then a quantitative easy theft will already have taken place…Sorry for those who weren’t dancing at the biggest party ever…No change…