Saturday, May 23, 2020

"Dr. Doom" At It Again: Predicts 10-Year Depression

That would be Nouriel Roubini of NYU who got his moniker back during the Great Recession, which he called pretty well in 2006.  He did this clearly yesterday in an interview in The Intelligencer, although he has been pushing something like this for some time now, bringing in all sorts of things like climate change and more pandemics to reinforce this long run forecasr, although he thinks in a decade there may be a sufficient restrucuting of the economy to improve the situation.  While he mostly does not talk about what should or could be done in the US, he seems to improve of a German type economy where the unemployment rate has risen only 1% in comparison to the massive increase towards 20%  we have sseen in the US.  Of course, Germany has managed the coronavirus much better than has the US, but they also have their Kurtzarbeit labor system that tends to preserve employment better during downturns, not to mention a broader social safety net as part of its social market economy.  He says things might have been better if we had Bernie Sanders as president, but then notes that compared to Merkel in Germany and even Boris Johnson in UK, Sanders is a right winger.

Roubini thinks that various policy stimuli put in place in the US will lead to a temporary period of growth, but that this will pan out fairly soon with growth turning negative, leading to something more like an L or U shaped pattern.  The key will be massive defaulting on debts as the impact of maassive unemployment works its way through via lots of non-payment on servicing those debts.  He also argues that a factor in the longer term depression will be a resurgence of inflation partly due to the negative supply-side aspects of the depression due to deglobalization and higher costs of new technology, exacerbated by an emerging US-China cold war that will have the US paying more for 5G systems. This will in turn lead to higher interest rates, and these will add to the tanking of the debt load, which he notes could not stand it when the Fed wanted to push the fed funds rate above 2.5% at end of 2018 when the economy was doing very well.

I do not know if he is right, and I  have seen a least one wisecracker argue that Roubini has predicted "the last 15 recessions out of 1," but I do see some serious dangers ahead if mor is not done to provide support for those out of work and small businesses.  Ending of enhance unemployment benefits in a situation of widespread unemployment in July would provide a negative shock, and another negative shock is beginning to come out of state and local governments as they deal with their mounting budget crises by massive layoffs.  Unlike the federal government they cannot run budget deficits, and tax revenues are and will be way down, which points to the need for some serious federal aid to them.  This was provided in the 2009 stimulus, of which about a third was such aid to state and local governments, although even that did not prevent those governments from continuing to be a drag on growth until as late as 2013. But as of now the Senate following Trump is refusing to move on this, invoking some sort of fantasy that it is only blue states having fiscal problems.  As it is, most analyses see the shock to state and local finances being much larger now than then.

Roubini may be overdoing his "Dr. Doom" routine, but he certainly points out to dangers to what so far is at best a barely there nascent recovery.

Barkley Rosser


nobody said...

It's hard to see any way he could be wrong about the big picture. Individuals, businesses, and governments (globally) are taking on huge debts to bridge over lost employment, lost orders, and lost tax revenues. A debt-deleveraging recession/depression is inevitable.

Most central banks have literally zero room for (conventional) maneuver to cushion the blow. Continued dysfunction in the Eurozone makes pan-European fiscal countermeasures unlikely. Political decay in the US, which has now reached the point that Republicans are openly plotting for the persecution of Democratic states, mean that effective fiscal stimulus in the US is also unlikely.

I am less convinced about the prospects for cost-push inflation, however. Debt levels could pull demand low enough that suppliers won't have the ability to push costs onto their customers. Much supply capacity will simply evaporate as major projects are abandoned due to lack of money and/or lack of demand. No one will build out 5G if no one can spare $200 a month in fees to use it.

This won't be a temporary thing, either. Median living standards will likely regress by a few decades at best, and probably stagnate for generations. An L-shaped depression is the best outcome; a downward slope \ is entirely possible.

Anonymous said...

He also argues that a factor in the longer term depression will be a resurgence of inflation partly due to the negative supply-side aspects of the depression due to deglobalization and higher costs of new technology, exacerbated by an emerging US-China cold war...

[ Dean Baker is arguing similarly about a resurgence of inflation. As for the "emerging Cold War" which will include Russia, I find this terribly worrying. ] said...

nobody sais and Anonymous,

The part of the Doom scenario I find the weakest is the one n.s. also expreeses some doubt about, the prospect of a supply-side inflation. That is key to the debt collapse story he tells, which might happen, bu is by no means ievitable. The fed is certainly going to do its best to avoid or offset such a scenario, although its power does have limits.

But in fact the key to the collapse is Doom assuming the Fed will endeavor to keep positive real interest rates, when we are in a situation where some (including Trump) are calling for nominal negative target rates, which we may yet see. This tells me that there is no reason to believe that if the 4% inflation appears that Doom forecasts we shall see the Fed push target rates to 5%. Yes, the latter might well trigger a debt collapse, but that is precisely why they might be highly unlikely to do it. We have seen negative real interests quite a few times in the past in the US.

I shall be pompous, since A. brings in Dean Baker, and note that while the two of them are often listed together as the people above all others who called what happened in 2007-08, I did better at the time, if with less publicity, something Dean has actually publicly ackknowledged. So, in 2006 once it became clear housing prices were declining and then housing construction began to fall, both of them forecast recession starting at the beginning of 2007. i accepted their analysis but noted that the dollar was falling in value and forecast that would prop up exports for awhile, thus putting off the recession for awhile. And that is exactly what happened. During most of 2007 falling construction activity was roughly offset by rising exports, with this only ending by the end of 2007, which was when we finally went into recession, although it was still well into 2008 before GDP actuallly began its decline.

Anonymous said...

This tells me that there is no reason to believe that if the 4% inflation appears that Doom forecasts we shall see the Fed push target rates to 5%....

[ The bond market suggests there will be no such Fed action. Paul Krugman suggests the same. ]

Anonymous said...

Barkley Rosser, nice explanation.

Peter T said...

Inflation is due either to loss of confidence in the state (the Weimar, Zimbabwe, Venezuelan hyper-inflations) or to an unresolved tussle between capital and labour. Since labour is thoroughly repressed in the US, inflation is unlikely.

That said, given debt loads, inequality, the slow relentless pressure of climate change, the loss for some years of some lucrative sectors (international tourism for one, with associated flow-ons to airlines, plane makers and air cargo) and a likely shift in both China and the US to reduce their dependence, I think there is every chance of a prolonged recession.

Calgacus said...

Slipped by me on the first reading

Here is what Roubini said: If Bernie Sanders had become president, maybe we could’ve had policies of that sort. Of course, Bernie Sanders is to the right of the CDU party in Germany. I mean, Angela Merkel is to the left of Bernie Sanders. Boris Johnson is to the left of Bernie Sanders, in terms of social democratic politics.

It's a good rule, when one sees "notes that" or "points out that" or here "of course" - that these are going to be followed by whoppers. Preposterous statements which are the reverse of the truth.

No, on this planet, "in terms of social democratic politics" Bernie Sanders is quite a bit to the left of the CDU, Angela Merkel, Boris Johnson etc. This lunacy from Roubini deservea to be "pointed out", "of course". :-)

Fred C. Dobbs said...

The Price of a Virus Lockdown: Economic ‘Free Fall’ in California

NYT - Tim Arango and Thomas Fuller - May 26, 2020

... California was the first state to shut down to counter the coronavirus and has avoided the staggeringly high infection and death rates suffered in the Northeast. But the debilitating financial costs are mounting every day. California has an estimated unemployment rate above 20 percent, according to Mr. Newsom — far higher than the 14.7 percent national rate and similar to the estimated rate for New York State, where the virus has hit the hardest.

In Los Angeles, with movie productions shut down, theme parks padlocked and hotels empty, things are even worse: The jobless rate has reached 24 percent, roughly equal to the peak unemployment of the Great Depression, in 1933.

“Economic free fall,” is how Tom Steyer, the former presidential candidate, described it. He is heading the state’s economic recovery task force, a group of business leaders, labor activists, economists and former governors who have begun meeting to plot a way out.

California faces a daunting budget deficit of $54 billion, which could force painful cuts to schools, social programs, health care and road building. And the state was the first to borrow from the federal government to finance its $13 billion in unemployment claims.

California has a hugely diversified economy, and many of the industries that have made it so strong are also the ones getting hit the hardest. By many measures California, which has the nation’s largest tourism industry, public university system, entertainment industry and port system and produces far more food than any other state, stands to lose more in the coronavirus-induced recession than anywhere else.

In a matter of weeks, the number of unemployed Californians, around 5 million, has more than doubled the number of the jobless at the peak of the Great Recession. ... said...


I think you are right that Bernie is in fact "to the left" politically of both Merkel and Johnson. I think the point of his comment is that if one looks at what Bernie proposed (and Doom is sympathetic with) is still "to the right" of policies in place in both Germany and UK that are supported by their current leaders. In Germany their labor management policies are well to the left of what Bernie specifically proposed and have worked to keep the German unemployment from barely rising, about by 1% I have last read, and in UK their socialized medicine system, supported by Johnson, is also "to the left" of the single payer-Medicare for all proposal by Bernie. Those points are correct, an I suspect what Doom was referring to.


Yes, California has been hard hit economically. I suspect they may be dawdling a bit more than they should in getting going on reopening, but they certainly have done a good job of keeping the virus under control given how early it arrived in their state, especially in the vulnerable Bay area.

Calgacus said...

Yes, I understood that too. It has some merit, but I don't agree with it as much as you do. The Green New Deal, overall is way to the left of the German labor policies - which include minijobs, no minimum wage for a long time, Hartz "reforms" etc. A macro job guarantee is more powerful than all those "micro" German policies put together - and has much the same effect. Boris, like the rest of the UK political class has been trying to destroy the world's most efficient health care system - after it saved his life.

Fred C. Dobbs said...

Argentina’s default may be a harbinger for other countries in debt via @BostonGlobe

Joseph E. Stiglitz - May 27, 2020

Argentina went into technical default last Friday when the 30-day grace period expired on $500 million interest due on $65 billion owed to private creditors. The forecast is that many other countries, including the republic of Congo, Zambia, and possibly El Salvador, Iraq, Sri Lanka, and Brazil will not be able to pay what’s owed as the coronavirus pandemic translates into a coronavirus economic crisis: Money is rushing out of the countries, exports are collapsing, and commodity prices are plummeting. That’s why how things play out for Argentina may be so consequential. It’s a harbinger for other countries in debt.

It may help explain what has puzzled many about how the creditors negotiated. They played hardball. After Argentina put an offer of the table near the limit of what it said it could pay — an analysis of sustainability backed by the International Monetary Fund and a host of economic experts (including me) who signed a letter published in Project Syndicate — the largest creditor group made a counteroffer that was so beyond what the country could afford it was laughable. After the first deadline had passed on May 8, it countered with another offer, which was still way beyond the kind of deal that the IMF said was sustainable. (Full disclosure: Martin Guzman, Argentina’s economy minister, worked with me at Columbia University.)

The context, the coronavirus pandemic, made such obdurate behavior harder to understand. What’s at stake was made clear by the headline in a New York Times op-ed, “Lives Depend on Argentina’s Debt Talks.” Senator Elizabeth Warren of Massachusetts captured the spirit on Twitter: “With COVID-19 worsening an already weak economy, this is no time for Wall Street creditors to exploit any country struggling to deal with debt burdens. A fair deal will help save more lives.”

Perhaps the creditors managed to put all sense of humanity aside as they thought about how much of their money might be at stake: If they’re soft on Argentina, it may bode poorly for all those negotiations with other countries down the line.

Beyond the pandemic, the situation in Argentina is different from typical negotiations in ways that may be disconcerting to creditors. The IMF and Argentina have been working together closely, unlike in the past. IMF experts noted that even before the coronavirus pandemic, Argentina’s debt was unsustainable. The country couldn’t pay what was due. Increasing taxes, in an attempt to squeeze more money out of a stone, is counterproductive and dangerous. It would lead to a massive contraction of an economy already suffering from recession, making it even less likely that Argentina could make future debt payments. That’s why there’s a consensus not only that the debt must be restructured — including a grace period for growth, lower interest rates, a change in maturity, a reduction in principal — but also that the restructuring itself has to be sustainable. It doesn’t do anybody any good to have another debt crisis five years down the line, which has been the standard course of debt restructurings in the past because of short-sighted market demands. ,,, said...


Fair enough. Points taken. I am not going to debate this further, just was trying to make sense of Doom's argument, not out to defend it to the last soldier.


Interesting and disturbing news that I have not seen in the MSM yet. Argentina has blown before without setting off the rest of the world, although they did mildly so once. But it may be that Doom's debt crash scenario will come sooner rather than later without any need for inflation arising and triggering higher interest rates from the Fed.

Fred C. Dobbs said...

The Federal Reserve offered a grim outlook for the economy in 2020

NY Times - June 10

The Federal Reserve left interest rates unchanged and near zero on Wednesday as the central bank projected a slow economic recovery from the pandemic-induced recession.

In their first economic projections this year, Fed officials indicated that they expected the unemployment rate to end 2020 at 9.3 percent and remain elevated for years, coming in at 5.5 percent in 2022. Output is expected to be 6.5 percent lower at the end of this year than it was in the final quarter of 2019.

“Nearly 20 million jobs have been lost on net since February,” the Fed chair, Jerome H. Powell, said at a news conference following the release of the forecast, and noted that the figure probably understates the extent of unemployment. “The downturn has not fallen equally on all Americans.”

The new forecasts predict a much slower path back to economic strength than the Trump administration — and perhaps the stock market — seems to expect as the economy climbs out of a virus-spurred downturn. The Fed skipped its quarterly economic summary in March as the pandemic gripped the United States, sowing uncertainty as business activity came to a near standstill.

The Fed said that it would continue buying government-backed debt “at least at the current pace” to sustain smooth market functioning, and that it “will closely monitor developments and is prepared to adjust its plans as appropriate.”

Mr. Powell said that the Fed would do “whatever we can, and for as long as it takes” to support the recovery and “limit lasting damage” to the economy.

Fred C. Dobbs said...

Argentina and the Future of Finance Capitalism

The Nation - Joseph Stiglitz - May 29

It’s no news that the world is going through a pandemic, and that the pandemic is having unprecedented impacts on the global economy. While here in the United States the true unemployment rate soars to 25 percent or more, the pandemic has had an even more devastating effect on less-developed countries around the world. Because of poverty, their baseline levels of health are already lower, their citizens live in more crowded and less sanitary conditions, their health care systems lack the capacity to deal with the huge increase in patient numbers, and they have much fewer resources to cope with the health and economic impacts of a prolonged pandemic. We can expect a surge in the number of countries facing debt restructurings—especially among those already overburdened with debt.

That’s why what happens to Argentina is so important. Argentina’s struggles to restructure its debt with BlackRock, Pacific Investment Management Co, and the country’s other major creditors will tell us a lot about the nature of 21st century finance capitalism and the mindset and morality of the creditors: Do they value money over lives? Will they remain shortsighted—a myopia so clearly demonstrated in the run-up to the 2008 financial crisis? Will they stick to their recent rhetoric about “social responsibility” and going beyond just looking after the interests of shareholders? Or is that just rhetoric?

A mild dose of rationality would indicate caution in trying to push Argentina beyond the point of reason. Argentina has made an offer to its creditors that is at the outer limits of what is sustainable—that is, at reasonable estimates of growth rates and other relevant variables, a sum Argentina could possibly pay back. Traditionally, creditors have asked for more than that, which is why half of all debt restructurings wind up being followed by another debt restructuring within five years. The creditors provide too little relief—and they typically provide it too late. Nobody wins from such strategies. The people in the debtor country suffer, and the creditors don’t get back the money they counted on. Far better to agree to a sustainable debt restructuring.

If public reports on the negotiations are correct, it suggests that Argentina’s creditors haven’t adjusted to the new realities of the pandemic—though it simply doesn’t seem possible that they live in such a bubble that they are unaware of what is going on, that the news of the pandemic and its devastating economic consequences hasn’t reached them. ...