Davos leaves Nouriel Roubini downbeat about policy coordination and Egypt contagion risks
Piggybacking off of my last post highlighting Nouriel Roubini’s talk with Simon Constable, I wanted to present three videos from Roubini’s appearance on NBC Europe this morning.
In the earlier pre-Davos Wall Street Journal interview, Roubini was pointing out that great risks still remain in the global economy. He highlighted the need for policy coordination to avoid them from creating havoc due to still problematic global imbalances. Unfortunately, Davos has left Roubini with the impression that policy makers are not up to the policy coordination challenge.
This interview talks a lot more about China. The other guest on the show, Stephen Gallo, makes a crucial point about the US side of this equation, however. Monetary and fiscal stimulus can only reflate the US economy by reducing savings rates and inducing credit growth, which is at odds with the need to deleverage and will make the next recession riskier due to the greater need to deleverage. My view is that we are in a secular phase of deleveraging, a balance sheet recession for households and financials. However, the balance sheet recession creating deleveraging pressure will not be overwhelming in all instances; excess liquidity and fiscal stimulus can counteract it, driving a cyclical recovery. When recession hits, the deleveraging resumes with a great vigour, made more extreme by defaults and financial distress. This is an economic view about decreased volatility followed by increased volatility, i.e. of greater upside but also greater downside. Take a look at video number one.
In video two, Roubini discusses Egypt contagion risks as well as difference in European and American policy agendas. You can see my take on the austerity/stimulus debate and the European debt problem, in line with the arguments Roubini makes. The guests discuss bond market vigilantes in video three. I don’t think they have anywhere near the power market participants seem to. They didn’t in Japan and they don’t in the US. Interest rates are really about private portfolio preferences as influenced by inflation and exchange rates. See Market discipline for fiscal imprudence and the term structure of interest rates. Absent a substantial uptick in inflation or a substantial decline in the exchange rate, interest rates will not be high.