As the S&P500 breaks through to an all time high today, Nouriel Roubini is out with a dire ruminations about the global economy. Much of it is sensible enough: Eurozone tail risks; Chinese imbalances and Japanese desperation.
For Roubini the one beacon of hope is the US, where risks remain but on the whole:
The US is experiencing several positive economic trends: housing is recovering; shale gas and oil will reduce energy costs and boost competitiveness; job creation is improving; rising labour costs in Asia and the advent of robotics and automation are underpinning a manufacturing resurgence; and aggressive quantitative easing is helping both the real economy and financial markets.
But risks remain. Unemployment and household debt remain stubbornly high. The fiscal drag from rising taxes and spending cuts will hit growth, and the political system is dysfunctional, with partisan polarisation impeding compromise on the fiscal deficit, immigration, energy policy and other key issues that influence potential growth.
However, Roubini has been out-beared for once with the risks he outlines for the US taken on by former Ronald Reagan budget advisor, David Stockman, who has created a storm of debate in the past 24 hours with a damning assessment of consecutive US administrations going back to Nixon for abandoning sound money policies in favour of Keynesian pump-priming.
Stockman is a pragmatic Austrian economist who argues for a sound money monetary regime, fiscal discipline and capital investment driven growth (as opposed to demand pumping). While I take exception to some of Stockman’s views on the GFC and the role Keynesianism in general, Stockman has a very good point to make. Mainstream economic management needs to embrace more Austrian principles lest it destroy itself via debt and speculation.
From the New York Times:
The Dow Jones and Standard & Poor’s 500 indexes reached record highs on Thursday, having completely erased the losses since the stock market’s last peak, in 2007. But instead of cheering, we should be very afraid.
>Over the last 13 years, the stock market has twice crashed and touched off a recession: American households lost $5 trillion in the 2000 dot-com bust and more than $7 trillion in the 2007 housing crash. Sooner or later — within a few years, I predict — this latest Wall Street bubble, inflated by an egregious flood of phony money from the Federal Reserve rather than real economic gains, will explode, too.
Since the S.&P. 500 first reached its current level, in March 2000, the mad money printers at the Federal Reserve have expanded their balance sheet sixfold (to $3.2 trillion from $500 billion). Yet during that stretch, economic output has grown by an average of 1.7 percent a year (the slowest since the Civil War); real business investment has crawled forward at only 0.8 percent per year; and the payroll job count has crept up at a negligible 0.1 percent annually. Real median family income growth has dropped 8 percent, and the number of full-time middle class jobs, 6 percent. The real net worth of the “bottom” 90 percent has dropped by one-fourth. The number of food stamp and disability aid recipients has more than doubled, to 59 million, about one in five Americans.
So the Main Street economy is failing while Washington is piling a soaring debt burden on our descendants, unable to rein in either the warfare state or the welfare state or raise the taxes needed to pay the nation’s bills. By default, the Fed has resorted to a radical, uncharted spree of money printing. But the flood of liquidity, instead of spurring banks to lend and corporations to spend, has stayed trapped in the canyons of Wall Street, where it is inflating yet another unsustainable bubble.
When it bursts, there will be no new round of bailouts like the ones the banks got in 2008. Instead, America will descend into an era of zero-sum austerity and virulent political conflict, extinguishing even today’s feeble remnants of economic growth.
I recommend heading to the site to read it in full. Here is Stockman in an MSNBC video:
Visit NBCNews.com for breaking news, world news, and news about the economy
And here is an audio from Bloomberg radio:
