Nouriel Roubini: “we’re going into a recession”

Bloomberg Television highlighted the following earlier today:

Nouriel Roubini spoke to Bloomberg TV’s Margaret Brennan today, giving his latest forecast for the U.S. economy, the European debt crisis and economic challenges in China.

Roubini told Bloomberg TV, "we’re going into a recession based on my numbers" and that "we are running out of policy tools" as the U.S. and European governments no longer have the resources to bail out their troubled banks.

Bloomberg also added the following bullet points about the analysis made by Nouriel Roubini, both regarding US policy options, Europe and emerging markets:

Roubini on what the Fed could do at this point to avoid a recession:

"We’ve reached a stall speed in the economy, not just in the U.S., but in the euro zone and the UK. We see probably a 60% probability of recession next year and unfortunately we’re running out of policy tools. Every country is doing fiscal austerity and there will be a fiscal drag. The ability to backstop the banks is now impossible because of political constraints and sovereigns cannot bail out their own distressed banks because they are distressed themselves."

"Everyone would like a weaker currency, but if the currency’s weaker, another has to be stronger. There’ll be more monetary easing and quantitative easing done by the Fed and other central banks, but the credit channel is broken. The velocity has collapsed and all the extra money is going into reserves. There was asset deflation, but it occurred because the economic numbers in August started to improve even before QE was done. This time around the macro data is negative, so yes, the market is rallying on the expectation of QE3, but I think it will be a short-lived rally. The macro data, ISM, employment, and housing numbers will come out worse and worse, the market will start to correct again. We’re going to a recession, we are at stall speed and we are running out of policy bullets."

On whether there are any monetary policy tools that might be more helpful than others:

"The ones that are being discussed by the FOMC will not have much of an effect because if you lengthen the maturities, you are buying long-term Treasuries and selling short-term, you are flattening the yield curve in a way that hurts the banks…This time around we will not have an additional purchase of Treasuries or fiscal stimulus. We will have a fiscal drag and the short-term effect of a rally in the market will fizzle out when the real economy is going in the tank. We are entering a recession based on my numbers."

On what President Obama and Congress could do if Bernanke doesn’t have the ammunition:

"We certainly need another fiscal stimulus. Much stronger than the one we had before. The one we had before was not enough. Congress is controlled by the Republicans and they’re going to vote against Obama in the realm of fiscal austerity. If things get worse, it’s only to their political benefit."

"[The American Recovery and Reinvestment Act of 2009] was effective in the sense that the recession could have turned into a Great Depression. Things would have been much worse without it, so it was very effective in the sense of preventing a Great Depression, but it was not significant enough. With millions of unemployed construction workers, we need a trillion dollar, five-year program just for infrastructure, but it’s not politically feasible and that’s why there will be a fiscal drag and we will have a recession."

On the yield curve signaling not signaling a recession and whether there’s a distortion with the reporting of the Fed:

"Traditionally, you can have inversion of the yield curve. Right now, we have policy rates at 0 and we cannot have this inversion of the curve, but the bond market as opposed to the stock market is expecting a recession. We’re having a growth scare in spite of the worries about the credit risk of the sovereign. After the S&P downgrade, bond yields fell from 2.5% to 2% or below. The bond market is telling as a recession is coming and the flattening of the yield curve is telling us that. We cannot have an inversion because you can have negative long-term interest rates. That’s the reason we don’t see the inversion."

On Europe and what can be done to stop contagion:

"Not much is going to be enough. Once the FSF is passed they will run out of money in a matter of months and unless you triple the FSF or have euro bonds, then if Italy and Spain lose market access, there will not be enough money to back stop them…I don’t think it is politically feasible to tell the German public they’re going to backstop several trillion dollars of debt of that in the periphery. If we will not have a euro bond, what happened in the case of Greece will happen not just in an exceptional way as they said in Greece, but Portugal, Ireland and eventually Italy and Spain."

On whether there’s anything to prevent a debt crisis from becoming a true systemic financial crisis:

"The banks in Europe are already in trouble. Banking risk has become sovereign risk when the banks were bailed out by the sovereigns, but now the sovereign risk is becoming banking risk because you have a bunch of distressed near insolvent sovereigns who cannot backstop their own banks. There is a good chunk of the government debt held by the banking system. It is a vicious circle between the sovereign risk and the banking risk. You cannot separate them. The current approach of the Europeans is to muddle through and kick the can down the road. Extent and pretend. It is not a stable equilibrium. It’s an unstable disequilibrium. Either the Europeans go in the direction of a greater economic monetary fiscal and political union or the only other alternative is a disorderly default or work out and eventually break up of the monetary union."

On China and its growth prospects:

"China in the short term can maintain growth because there will be a severe recession and advanced economies will do more monetary and fiscal and credit stimulus. The reality is that their economy is imbalanced. Fixed investment has gone now to 50% of GDP. No country in the world can be so productive and take half of the output to invest into capital stock. You’ll have a surge in public debt, it’s already 80% of GDP including local government…I see a hard landing in China as the likely event, not this year or next year, but by 2013 when this over investment move will go bust."

"Even without the slowdown of the U.S., this over investment boom is going to go into a bust in a hard landing. We’re going to have weakness in the U.S., Europe and Japan. That is going to accelerate the climate in which the weakening of China will occur."

On the possible debt exposure for Chinese banks:

"If you are looking at the Chinese banks, they have huge exposure to state and local governments and special purpose vehicles that have done the financing of the local investment. There has been at several trillion dollars yuans and we estimate 30% of these loans will go into default and become underperforming. The heat will be on the Chinese banks."

On Brazil:

"Brazil has some strong economic fundamentals…Our forecast that when the recession in advanced economies hits, economic growth in Latin America, including Brazil, is going to slow down as sharply next year compared to this year. Brazil has its own other domestic problems. If they do the structural reform that’s needed, it could have high potential growth, but the question is whether the new president will be willing to do those structural reforms to reduce the distortion and increase the potential growth of the country. There may be some political economy constraints to doing that."

I don’t see anything major to disagree with here either on the economics or the policy view; Nouriel makes a lot of sense. Notice he’s pegging recession odds at 60%. That number for him was 30% as recently as a month or two ago.

The video below runs 13 minutes.

Also see my video from yesterday’s talk about the economy with BNN’s Howard Green and Ryan Avent of the Economist. My analysis there was that recent macro data have been weak, telling me we are “dangerously close” to an outright second statistical recession within this larger depression. Notice the numbers out of Canada today support the view via exports from Canada to the US that there is no economic growth in the US.

Click on the picture for the discussion. For more discussion on the same issues, see the posts from yesterday which preceded the BNN talk (Chart of the Day: Consumer Confidence and Achuthan: "It’s Too Late" for Obama on Jobs and All twenty metro areas with monthly house price increases in Case-Shiller).

Edward Harrison

Source: Bloomberg Television

  1. J. Michael Dunn says

    this time,dr. doom may be right.

    1. David Lazarus says

      I think he was right all along. All the stimulus and QE was to avoid the depression. Without these boosts to the economy it will be a return to depression. Don’t forget that governments can change direction of the economy if they want. Without any fiscal stimulus the economy will slow to the point of recession, and then depression. We have not avoided any depression just delayed its impact for a few years.

  2. Scott Rickard says

    For sure!

  3. Scott Rickard says

    For sure!

  4. Demetri says

    Great interview of Lew Rockwell and what QE3 Fed intervention really means for the rest of us landless proletariat. Says banks aren’t lending out their reserves because doing so would cause hyperinflation. I think its a good point that the anchor made. Not enough people talk about the breakdown in the money multiplier and the effect that this has had in preventing inflation. Everyone is obsessed with inflation fears, but u can’t have inflation if there is such a huge debt overhang that requires banks to stockpile reserves ahead of write downs –

    1. Edward Harrison says

      The hyperinflation talk gets the facts wrong. Banks are never reserve constrained. For example, Canada has no reserve requirement. Banks are capital constrained. See here:

      1. Demetri says

        I read your post. What do you mean they are capital constrained but not reserve constrained. If a bank is receiving deposits, that represents capital. That capital acts as a cushion against possible drawdowns from depositors, so the bank then has the freedom to create more liabilities on itself by issuing more debt, effectively lending out money that it doesn’t have. That is the money multiplier in effect. I don’t understand why you say that this type of pyramid lending does not work?

        I understand the argument that loans come first and reserves come second, because a loan can end up as a reserve on a bank’s books, but that original loan has to come from the central bank itself issuing out the liability against itself. A bank with zero capital cannot lend out money if there are no reserves on hand because then it is acting as a central bank. If there are no reserve requirements at all, then the private bank is issuing fiat liabilities.

        What am I missing here?

        1. Edward Harrison says

          No, the loan comes from the bank itself not the CB. Banks ‘create money’ by making loans. That’s why ours is a fiat ‘credit’ system.

          See here:

          “Theoretically, banks could lend out up to 10 times their reserves if the reserve ratio is 10% (money multiplier: loans = 1/reserve ratio). In reality, however, banks make the loans first and then look to the reserves afterward. That means some banks are short reserves and must borrow them in the interbank market.

          When the entire banking system reaches the reserve limit, the central bank could theoretically create a credit crunch by refusing to increase reserves. But then the Fed would not be able to manipulate short-term interest rates. The Fed Funds rate is dependent on the central bank’s supplying the required amount of reserves at any given reserve ratio to keep the interest rate at its target. So in practice, central banks always increase the level of reserves desired by the system in order to maintain the interest rate.

          My point is that the money multiplier is a fallacy in a fiat currency credit system and we see that now that we are in a balance sheet recession in which credit growth is subdued due to private sector deleveraging.”

          1. Demetri says

            Read that one too.

            Right, but when i say that the “loan” must come from the central bank, this is why i say later down that if a private bank issues loans without reserves it is acting as a central bank because it is issue fiat liabilities, because the money that it is lending out in the form of a loan that is now sitting as an asset on its book can be defaulted on and the bank doesn’t lose a dime, since it didn’t have one to begin with.

            “That means some banks are short reserves and must borrow them in the interbank market.” – ed

            yes, thats’ absolutely true, but that is a relative phenomenon. They are making loans but borrowing the funds from another bank that has them to lend to the bank to cover the shortfall. If there is an overall shortfall in the economy, then the solution is an increase in the money supply, which means the extension of more fiat liabilities by the central bank.

            Does this explanation in this article make sense to you, and if not, would you mind pointing out what does not from an MMT perspective? –


        2. Edward Harrison says

          Also, deposits are not capital. Capital is capital and it represents the cushion of assets in excess of liabilities. Deposits are liabilities. While loans are assets.

          1. Demetri says

            Let’s define capital and reserves.

            Capital, in my view, in a fiat money system is represented by fiat liabilities issued by a central bank that are recognized as legal tender. Is this your definition?

            Reserves are capital or equity. Loans on the banks books as securitized assets are not capital.

          2. Edward Harrison says

            Reserves are not capital. That is the point. Capital is the excess of assets over liabilities. Reserves are about hitting an interest rate target for the CB and have no operational relevance to lending or credit.

          3. Demetri says

            and what resource would u recommend for someone with an austrian perspective who wants to understand MMT? like what book to start with?

  5. Jim says


    Is it safe to assume that the only missing piece to make a recession call is rising unemployment – aka, unemployment rising above 500K?

    Or are there a few other indicators you are watching before you’d feel confident in saying “We’re in a recession”?

    1. Edward Harrison says

      I almost always look to the (y-o-y) change in average jobless claims as a coincident indicator for recession. If jobless claims are 30-40K more than at this time last year, then we are close to recession. Last year claims were averaging 480K, now they are 410K. That doesn’t look like recession yet to me. tarting in the fall, I expect this comparison to become unfavourable.

  6. Edward Harrison says

    Demetri, sorry for the short responses. I have been using a mobile device. I suggest you try Randy Wray’s book:

    Judging from our conversation, you seem to be conflating reserves and capital. Capital is the only relevant metric as a lending constraint. Reserves in today’s world of fiat currency serve to hit a target interest rate.

    The point is the CB wants to target rates and it can’t do that unless it supplies the banks with the reserves they desire to make loans at that rate.

    Any monopolist can only control either price or quantity, not both. And the CB control price i.e. the interest rate. To do so, they must be committed to supplying a much reserves as banks want/need for the lending that they do according to their capital constraints. Failure to supply the reserves means failure to hit the Fed funds rate target.

    This means the banks are free to lend as much as they want subject only to the spread they can muster given the prevailing fed funds interest rate and the capital they must hold to lend prudently and have a cushion for writedowns. Again, the reserves have nothing to do with this. Any time you hear someone talking about reserves a a constraint on lending, you will know they haven’t got it right.

    1. Demetri says

      I’ll take a look at the book when it comes, but they take a while to ship out.

      I’m not sure where we are disagreeing and where we are not. In some ways, I feel that we are arguing over definitions of terms here, because I am in agreement with you on the mechanism by which money is created and the constraints on lending, but you are saying that the amount of cash that the bank has on deposit, which is what I have always considered reserves.

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