Nouriel Roubini Sees Great Risks in the US and Global Economy

Nouriel Roubini talks with the Wall Street Journal’s Simon Constable in the video below about both the developed economy – emerging economy divide that has developed as well as the challenges ahead for the US economy.  His view on both core issues dovetails well with my own.

First, on the emerging economy front, Roubini sees the monetary policy stimulus as exacerbating the already dynamic growth in EM markets by bringing a flood of money into EM markets as investors seek risk and yield. The problem for emerging markets is that they are loath to tighten policy to choke off rising inflation and potential asset bubbles because higher rates would invite more money chasing risk assets or profiting from the carry trade. On the other hand, not tightening will certainly create overheating. This problem for emerging markets points to the need for global policy coordination and is the genesis of the talk of so-called ‘currency wars’.

Second, in developed economies, the financial crisis has exposed the excessive debt and leverage that has been building in the financial and household sectors across a wide swathe of countries. The potential for a serious debt deflation of this private sector debt has been forestalled only through socialising the losses onto taxpayers, ballooning debt levels in the public sector. Now, both public and private sectors have high debt burdens. In the private sector, this will lead to crisis in the next downturn unless remedied.

The video below runs 15 minutes. Roubini discusses these topics and a lot more, particularly on issues of human capital and malinvestment.

I would add that, in the public sector, deficit spending will increase interest costs that can only be mitigated by higher future growth, inflation and/or currency depreciation. In the short term, the fragility of the financial and household sectors means that without stimulus, a depressionary relapse is possible. Over the longer term, unless we reach full employment and attain higher growth, the mounting public sector debt will mean a larger and larger percentage of spending will go to finance interest. Fiscal consolidation would loom unless government spending growth could be reduced.