Dr Doom Warns More Doom Ahead!

The worst is still ahead of us, warns Dr Doom, Nouriel Roubini. He was interviewed by Boomberg and wrote an article in Foreign Policy in early January 2009.

Summary of Key points here:

1. While the odds of a systemic financial meltdown have been reduced by the actions of the Group of Seven and other economies, severe vulnerabilities remain.


2. The credit crunch will persist and spread beyond mortgages. Deleveraging will continue, as thousands of hedge funds - many of which will go bust - and other leveraged players are forced to sell assets into illiquid and distressed markets, thus causing price declines and driving more insolvent financial institutions out of business. Credit losses will mount as the recession deepens. And a few emerging-market economies will certainly enter a full-blown financial crisis.

3. So 2009 will be a painful year of global recession and further financial stresses, losses and bankruptcies.

4. Certainly, the United States will experience its worst recession in decades. The formerly mainstream notion that the U.S. contraction would be short and shallow—a V-shaped recession with a quick recovery like the ones in 1990–91 and 2001—is out the window. Instead, the U.S. contraction will be U-shaped: long, deep, and lasting about 24 months (probability is two-third). It could end up being even longer, an L-shaped, multiyear stagnation, like the one Japan suffered in the 1990s (probability is now rising to a third).

5. Only aggressive, coordinated and effective policy actions by advanced and emerging-market countries can ensure that the global economy starts to recover -- however slowly --in 2010, rather than entering a more protracted period of economic stagnation.

6. As the U.S. economy shrinks, the entire global economy will go into recession. In Europe, Canada, Japan, and the other advanced economies, it will be severe. Nor will emerging-market economies—linked to the developed world by trade in goods, finance, and currency—escape real pain.

7. This scenario is dangerous for many reasons. A number of central banks will be close enough to setting interest rates of zero that their economies fall into a triple whammy: a liquidity trap, a deflation trap, and debt deflation. In a liquidity trap, the banks lose their ability to stimulate the economy because they cannot set nominal interest rates below zero. In a deflation trap, falling prices mean that real interest rates are relatively high, choking off consumption and investment. This leads to a vicious circle wherein incomes and jobs are falling, with demand dropping still further. Finally, in debt deflation, the real value of nominal debts rises as prices fall—bad news for countries such as the United States and Japan that have high ratios of debt to GDP.