Nouriel Roubini weighs in with another treatise of doom, this time focused on the continuing credit crunch. Perhaps, however, he has caught the holiday spirit because we think we sense a bit of hope in his latest prognostications: he thinks we may be in for a recovery by 2010…as long as banks are properly recapitalized and the credit crunch doesn’t get much worse.
A few of Noriel’s points:
He’s not worried about hyper-inflation. He thinks that depressed demand will allow us to avoid inflation despite zero interest rates. “But with aggregate demand falling below growing aggregate supply, slack goods markets will lead to lower inflation as firms’ pricing power is restrained. Likewise, rising unemployment will control labour costs and wage growth”
Staflation not a problem. Although the Federal Reserve has run out of ammo on the overnight rate, there’s little danger of stagflation because central bankers can use unconventional tools to stimulate the economy. “As traditional monetary policy becomes ineffective, other unorthodox policies will continue to be used: policies to bail out investors, financial institutions, and borrowers; massive provision of liquidity to banks in order to ease the credit crunch; and even more radical actions to reduce long-term interest rates on government bonds and narrow the spread between market rates and government bonds.”
More deflation ahead. “In the next few months, the macroeconomic news and earnings/profits reports from around the world will be much worse than expected, putting further downward pressure on prices of risky assets, because equity analysts are still deluding themselves that the economic contraction will be mild and short.”
Good news: A light at the end of the tunnel. “So 2009 will be a painful year of global recession and further financial stresses, losses, and bankruptcies. Only aggressive, coordinated, and effective policy actions by advanced and emerging-market countries can ensure that the global economy recovers in 2010, rather than entering a more protracted period of economic stagnation.”
Read the whole thing here.