Monday, August 22, 2011

Roubini and our economic mess

It is hard to make an easy summation of what is ailing or economy, and why we are facing further problems.  Nouriel Roubini makes a fairly brave stab at it, and even brings back the name of Karl Marx (as explanation, not as an ideal to be achieved) into the mix.

He notes that the reckless and excessive debt of the private sector caused a crises in 2008, with that debt now being shifted to the public sector with the financial bailout.

He notes that:
  • Current government cut backs, and likely increased taxes, are a drain on the economy.
  • World Governments are too strapped for cash to allow another round of bank bailouts.
  • Monetary policy is running into the headwind of increased inflation in Europe.
  • Countries need a weak currency to subside exports and grow their way out difficulties. But weakness is relative, and everyone cannot be simultaneously weak.
  • Large European countries (Italy and Spain noted) are at risk of losing their access to the bond market.  Without that market, the only way they can support deficit spending is through printing money- something they cannot do within the Euro.  It is both an implosion of government spending, and an implosion to those holding the debt.

Nouriel Roubini, Project Syndicate, 17 August 2011
New York - The massive volatility and sharp equity-price correction now hitting global financial markets signal that most advanced economies are on the brink of a double-dip recession. A financial and economic crisis caused by too much private-sector debt and leverage led to a massive re-leveraging of the public sector in order to prevent Great Depression 2.0. But the subsequent recovery has been anemic and sub-par in most advanced economies given painful deleveraging.
Now a combination of high oil and commodity prices [partially fueled by a Chinese construction bubble], turmoil in the Middle East [fueled by issues of global overpopulation], Japan’s earthquake and tsunami, eurozone debt crises [partially caused by demographic (aging) issues], and America’s fiscal problems - and now its rating downgrade - have led to a massive increase in risk aversion. Economically, the United States, the eurozone, the United Kingdom, and Japan are all idling. Even fast-growing emerging markets (China, emerging Asia, and Latin America), and export-oriented economies that rely on these markets (Germany and resource-rich Australia), are experiencing sharp slowdowns…
So Karl Marx, it seems, was partly right in arguing that globalization, financial intermediation run amok, and redistribution of income and wealth from labor to capital could lead capitalism to self-destruct (though his view that socialism would be better has proven wrong). Firms are cutting jobs because there is not enough final demand. But cutting jobs reduces labor income, increases inequality and reduces final demand.
I would put Marx’s conundrum slightly differently:  in most climates, the fuel of capitalism is expansion.  The obstacles to expansion can be structural (Marx’s point), or they can be a matter of external restraints to growth (peak oil, global warming, resource constraints, etc.).   Internal obstacles can be sometimes by met by “fixes” within the system; external restraints must be removed, overcome, or bypassed.  There is no logical construct that I am aware of that proves all obstacle, of either type, can be overcome.  So if you see an obstacle down the road, you would be advised to avoid it before you get there.
Mr. Roubini’s proscription is a sort of hazy middle of the road path.  It is not particularly inspired, but popular modern writing requires at least some pro forma solution to all problems.  It is called path dependence; We started down a path, and now we are where we are.  The solution was to choose another path. 

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