Wednesday, September 26, 2012

Roubini: Global Economy Faces Risks on Multiple Fronts

Keynesian economist Nouriel Roubini is probably one of the best Keynesians in terms of keeping a finger on the global economy.

Recently, he said, according to Moneynews.com, that the global economy faces four events that could merge into a perfect storm and deal an already tepid recovery a major blow in 2013.

Roubini told Foreign Policy magazine:

One is that the eurozone crisis gets worse and becomes a train wreck. The second one is that the fiscal cliff becomes severe in the United States and you have a contraction.
The third one is that you might have a hard landing in China, and the fourth one is the risk of conflict in the Middle East. 
I think that each one of them alone could trigger a global economic downturn because they’re all systemically important, let alone if several of them were to occur at the same time in a virulent way.
Roubini's points are correct, but there is more in terms of detail that can be understood.

The eurozone crisis will get worse. The ECB either prints aggressively which will lead to major price inflation or it doesn't and a number of EZ governments go into default.

The fiscal cliff is a major problem for the U.S., but unless interest rates climb rapidly in the near future, the cliff is likely at least a couple of years away.

China will crash given there massive manipulated economy, but the dangers of a Chinese collapse to the overall global economy are overrated.

The Middle East is the unkown quantity. If war breaks out with Iran, all hell breaks loose, for fear that Iran would attempt to block the all important oil shipping lane, the Strait of Hormuz.

In addition to these potential problems there's the $1.5 trillion in excess reserves that Philadelphia Fed President Charles Plosser has been warning about.

If a perfect storm develops with excess reserves flying into the system and Roubini's identified problems kicking-in, the volatility in the economy will be unprecedented, with the potential for both defaults at some points in time followed by near hyper-inflation.

1 comment: