Monday, June 13, 2011

Roubini Reads Redbedhead For Economic Advice

What do you think: is Dr. Doom, the soothsaying economist, famous for predicting the banking sector meltdown back in 2006 - two years before it happened - taking a peek at my prognostications for the economy? Hmmm...perhaps he's just reading the same stats as me, which only goes to show you that you don't need an MBA to read the writing on the capitalist wall: there's a perfect storm coming of growth-choking debt levels, over-priced commodities, a hard landing on the horizon in China and anemic growth in Japan. Unfortunately, if he were really reading my brilliant economic analyses, he would know full well that "de-leveraging" the economy - i.e. paying off debt - will not solve the problem.

Debt is a symptom of a system that is clogged with capital and suffering chronically low profit rates as a result. In the past the problem of "too much capital" has been solved with wars and/or depressions, which do a good job of destroying large quantities of capital and devaluing what's left, restoring higher levels of return on investment. But with economies now dominated by transnational corporations in manufacturing, resource extraction, retail and services, this mechanism becomes more complicated - the collapse of massive corporations takes down smaller businesses or even departments and subsidiaries that are themselves profitable. The cure threatens to kill the patient. So, while paying off debt can provide some measure of a controlled destruction of capital, it is not an efficient or particularly effective way to achieve the depth of destruction necessary. What generally ends up happening is akin to simply shifting the deck chairs on the Titanic - public sector debt is shifted to the private sector, primarily workers, who then have their ability to consume reduced, causing an increased crisis in the area of overproduction. Or private debt is shifted onto the public balance sheet, leading to crises of solvency and, ultimately, higher taxes and reduced services as government attempts to clean up their books, thus shifting corporate and banking debt back onto workers, thus reinforcing the same cycle.

None of this is to suggest economic collapse. There's lots of institutions and governmental and regulatory mechanisms to prevent an all-out collapse a la the 1930s. But it does suggest that we're in for a protracted period of slow growth with a sustained attack on living standards as the "go to" strategy by the ruling class to solve the economic crisis. In China, where pressures have been building for some time, there is the potential for a more acute form of crisis as bank loans to fund uncompetitive and surplus investment in infrastructure and manufacturing, etc could hit a wall. When that will happen is anybody's guess and is something that often explodes as a result of accidental factors - like the decision by the US government to let Lehmann Brothers go to the wall in 2007, sparking the financial meltdown. And the Chinese ruling class is pretty far-sighted and united (though there are divisions as I've discussed previously between the Deng Xiaoping "enrich yourself" model and the attempt to shift the economy towards higher levels of internal consumption and lower savings). They might just finesse a way out of the contradictions they face.

In any case, there's a growing number of downside risks, as they call them, that is increasing the odds that 2012-2013 could get ugly. How do I know? Because I read Roubini.

Roubini Says a ‘Perfect Storm’ May Converge on the Global Economy in 2013 - Bloomberg

Elevated U.S. unemployment, a surge in oil and food prices, rising interest rates in Asia and trade disruption from Japan’s record earthquake threaten to sap the world economy. Stocks worldwide have lost more than $3.3 trillion since the beginning of May, and Roubini said financial markets by the middle of next year could start worrying about a convergence of risks in 2013.

The MSCI AC World Index has tumbled 4.9 percent this month on concern recent data, including an increase in the U.S. unemployment rate to 9.1 percent in May, signal the global economy is losing steam. U.S. Treasuries rose last week, pushing two-year note yields down for a ninth week in the longest stretch of decreases since February 2008, on bets the Federal Reserve will maintain monetary stimulus.

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