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Nouriel Roubini Speaks Truth to Power

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When media reports surfaced last week claiming that the prophet of doom of the Global Economic Crisis, NYU economics professor Nouriel Roubini, had "improved" upon his previously gloomy economic forecast and predicted the recession would end by the close of 2009, a stock market rally was ignited. It seems it does not take much to facilitate a bear market sucker's rally on Wall Street at this time of global economic distress, including false rumours. To his credit, Roubini swiftly set the record straight with the following comment on his blog:

"It has been widely reported today that I have stated that the recession will be over 'this year' and that I have 'improved' my economic outlook. Despite those reports - however - my views expressed today are no different than the views I have expressed previously. If anything my views were taken out of context."

Nouriel Roubini has consistently stated that he expected the current recession-by far the worst America has experienced since World War II- to terminate by the close of the year. This has been his longstanding forecast. Thus, when he repeated this consistent prediction of his, the media went wild with excitement, discarding the continuity of his forecast and presenting his belief that by the close of 2009 the recession would end as a surprise revelation. With business journalism like this, no wonder the Dow Jones is searching new highs even as employment numbers continue to plummet.

What is noteworthy about Roubini's most recent insights on the economic situation are their increasingly gloomy tone related to the mid-term and long-term prospects for the American economy. This is largely predicated on the growing fiscal imbalance in connection with the public indebtedness of the United States. Though a supporter of the vast deficit-driven stimulus programs and expensive bailouts of the financial sector owing to his belief that to negate these policy responses would have resulted in the collapse of the global financial system and the free fall contraction of the U.S. economy, Roubini is not unmindful of the their consequences. In that sense, he parts company from other advocates of deficit-creating economic stimulus packages, including Paul Krugman, who prefer to discard the danger of the vastly-expanding debt of the federal government.

In addition to his concern about the ramifications of unprecedented levels of budget deficits, Roubini is also worried that the end of the recession he has long forecasted will now be only temporary, to be followed by a double dip recession during the latter half of 2010, interrupted by anemic growth of less than 1%.

The forces contributing to what, at best, will be a weak recovery in 2010 are linked to the uniformly negative statistics on employment which, according to Professor Roubini, have a direct impact on an economy as highly dependent on consumer spending as America's. According to Roubini, commenting on the latest employment numbers, "these raw figures on job losses, bad as they are, actually understate the weakness in world labor markets. If you include partially employed workers and discouraged workers who left the U.S. labor force, for example, the unemployment rate is already 16.5 per cent. Monetary and fiscal stimulus in most countries has done little to slow down the rate of job losses. As a result, total labor income -- the product of jobs times hours worked times average hourly wages -- has fallen dramatically."

In his recent observations on declining labor income and its relationship to the continuing financial and economic crisis, Roubini identifies how this factor will exacerbate several interlocking indices. Consumer loan defaults across the board-mortgages, students loans, credit card debt-will continue to increase, adding to the level of toxicity of assets on the balance sheets of banks, and extending the credit crunch. Government revenues will decline while the need to fund unemployment benefits and other social expenditures will grow, further increasing budgetary deficits. Professor Roubini summarizes the growing contradictions in utilizing fiscal and monetary policy responses as the primary sovereign means of countering the worst global economic disaster since the Great Depression as follows:

"The higher the unemployment rate goes, the wider budget deficits will become, as automatic stabilisers reduce revenue and increase spending (for example, on unemployment benefits). Thus, an already unsustainable U.S. fiscal path, with budget deficits above 10 per cent of GDP and public debt expected to double as a share of GDP by 2014, becomes even worse. This leads to a policy dilemma: rising unemployment rates are forcing politicians in the U.S. and other countries to consider additional fiscal stimulus programs to boost sagging demand and falling employment. But, despite persistent deflationary pressure through 2010, rising budget deficits, high financial-sector bailout costs, continued monetisation of deficits, and eventually unsustainable levels of public debt will ultimately lead to higher expected inflation -- and thus to higher interest rates, which would stifle the recovery of private demand."

This leads to what economists refer to as a "W" or double dip recession. In other words, the very policy responses politicians and their advocates claim are vital to restoring the economy may, by the end of 2010, become the principal enabler of forces that will unleash round two of the Global Economic Crisis.

Nouriel Roubini had warned for years that the subprime mortgage sector would bring about financial and economic calamity, and take down much of the investment banking industry. Today we would all be wise to listen carefully to Professor Roubini's warnings on the growing danger of a double dip recession and the long-term implications of a fiscal roadmap being pursued by our politicians that, in Roubini's prescient words, is "unsustainable." Given his track record, we can only discard the truth of which Roubini speaks at our peril.