Nouriel Roubini: 'There Is a Global Deflationary Risk'

Central bankers around the world are pulling out all the stops in order to combat a severe economic downturn that threatens to get even worse."There is a global deflationary risk," says Nouriel Roubini, economics professor at NYU Stern School and chairman of RGE Monitor. "That's what central bankers are worried about."In Europe today, the ECB and Bank of England slashed rates by greater than expected levels. Meanwhile, the Fed and Bank of Japan are taking "unorthodox actions" to pump liquidity into their economies. Both central banks are engaged in "quantitative easing," meaning rates are effectively zero regardless of what the official policy is."The Fed is trying to preemptively avoid a deflation trap [which] is very dangerous," Roubini says. "Whether they'll be successful or not, I don't know."The problem, he says, is there's going to be a "severe recession" both in the U.S. and globally in 2009. That means falling demand for goods and increased slack in the labor markets. That will put further downward pressure on prices and raise the risk of outright deflation, which is defined as: A persistent decline in general price levels, typically accompanied by a severe contraction in employment and economic output."It's hard to undo the structural factor" of falling demand meeting a supply glut of goods and services, he says, recommending the following policy actions to try and stem the deflationary tide:

A "huge" fiscal stimulus package: $500-$700B.
Recapitalize the banks faster, i.e., get TARP money distributed sooner.
Rather than focusing on mortgage rates, reduce the face value of debt owed by "insolvent homeowners" in order for them to be able to spend again and avoid a "tsunami of foreclosures."

Category:

News & Politics

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• Nouriel
• Roubini
• global
• deflation

[freedomthrough]

@mongobobo Well, essentially, since you have already had a current account deficit for ages, that's what's been going on. I don't see anything inherently wrong with it, though. Also, while you have a current account deficit and your private sector wants to net save (deflate debt), the government has to run deficits to allow it to do so.

[freedomthrough]

@truthadvocate Deflation is a problem, because deflation causes recession and thus waste by unemployment of resources. Humans aren't stable, thus the market can never be stable or naturally "equilibrate". Mass mentalities have a huge impact on what happens on the market.

I don't agree with some parts of this, though. The "recapitalisation of the banks"-part is not really necessary. A bottom-up tax holiday would do much to allow households to reach their preferred level of debt.

[kotpet]

more stupid is that all other gvs in the world incl. russians a buying t-bills! this is mad! buy alcohol and guns revolutiion is near!

[truthadvocate]

Deflation a problem? I think thats hilarious. The US dollar has lost 96% of it's value since we've had a fed. What happens when it's value hits zero? Deflation is the natural counterbalance to inflation. If you keep pumping up a balloon it's going to burst unless you let air flow out. I'm sick of this interventionist mentality. The natural exchange of goods & services in a truly free society is a thousand times more stable than any government regulated economy.

[mongobobo]

I believe the Fed is already buying Treasuries. This is not only enormously stupid but would be considered fraud in the business world. I don't think we'll have deflation much longer as the world sees how corrupt and stupid our fed and treasury are behaving. Unless of course the world wants to destroy their own quality of life in order to keep ours up.

[valhala56]

It could be worse, the earth could be hit by a large asteroid. Look on the bright side. :)