US Economic Malaise

I happened across the latest outlook for the global economy by Dr. Doom–Nouriel Roubini–over at Project Syndicate. We must share the same depressed muse.  His outlook is very similar to mine although he’s crunching numbers in computer models that I can only dream about.  It’s also a similar outlook to what Joseph Stiglitz indicated while in Davos.  You will not need sunglasses while facing the future if you’re in Europe or North America.  This will most likely be the decade of developing nations.  I don’t have the sophisticated programs available to Roubini but his forecasts seem reasonable.

The outlook for the global economy in 2011 is, partly, for a persistence of the trends established in 2010. These are: an anemic, below-trend, U-shaped recovery in advanced economies, as firms and households continue to repair their balance sheets; a stronger, V-shaped recovery in emerging-market countries, owing to stronger macroeconomic, financial, and policy fundamentals. That adds up to close to 4% annual growth for the global economy, with advanced economies growing at around 2% and emerging-market countries growing at about 6%.

The word anemic is never one you want to see when talking economic forecasts.  Roubini does identify a few possible black swan events related to things like the deterioration of the Spanish economy that could make anemic sound like a good thing.   His comments on the US economy indicate more of the same.  None of the same is pleasant.

The United States represents another downside risk for global growth. In 2011, the US faces a likely double dip in the housing market, high unemployment and weak job creation, a persistent credit crunch, gaping budgetary holes at the state and local level, and steeper borrowing costs as a result of the federal government’s lack of fiscal consolidation. Moreover, credit growth on both sides of the Atlantic will be restrained, as many financial institutions in the US and Europe maintain a risk-averse stance toward lending.

There’s some indication of our potential black swans in that paragraph.  Every economist is attuned to the solvency problems in states like Illinois, New Jersey, and California.  There is also no faith in the federal government’s ability to bail out any one but political donors.  The only hope I have for the situation is that it’s an election year and those do tend to be important states electorally for presidential wannabes.

The other trends that worry me are the trends in oil and food prices which could mean that huge countries like China may have to readjust their plans with their sovereign wealth funds.  Countries that import a lot of these items are going to be in for hefty bills. China is already experience inflation and has upped its interest rates.  Roubini is watching for further signs that they recognize the potential problem.  He also believes these tensions will further fuel currency tensions.

Roubini actually sees some upside risks and believes that we will slowly pull out of things.  He believes that all sectors are still engaging in balance sheet repair with the exception of the US government.  This is especially significant for the potential for jobs creation. If  corporations are lean and mean and things do improve, this could create some much needed labor demand.

Joseph Stiglitz wrote a column for the UK Guardian after his Davos trip for the World Economic Forum.  He may actually need to take the Dr Doom title from Robini.  He focused on some systemic things that you might find interesting.   Once again, we see an evaluation of the Efficient Market Hypothesis (EMH).  This is something that should’ve happened years ago.  He also mentions some skepticism of the monetarist (aka Milton Friedman) positions of central banks on inflation.

But this time, as business leaders shared their experiences, one could almost feel the clouds darkening. The spirit was captured by one speaker who suggested that we had gone from “boom and bust” to “boom and Armageddon”. The emerging consensus was that the International Monetary Fund (IMF) forecast for 2009, issued as the meeting convened, of global stagnation – the lowest growth in the post-war period – was optimistic. The only upbeat note was struck by someone who remarked that Davos consensus forecasts are almost always wrong, so perhaps this time it would prove excessively pessimistic.

Equally striking was the loss of faith in markets. In a widely attended brainstorming session at which participants were asked what single failure accounted for the crisis, there was a resounding answer: the belief that markets were self-correcting.

The so-called “efficient markets” model, which holds that prices fully and efficiently reflect all available information, also came in for a trashing. So did inflation targeting: the excessive focus on inflation had diverted attention from the more fundamental question of financial stability. Central bankers’ belief that controlling inflation was necessary and almost sufficient for growth and prosperity had never been based on sound economic theory; now, the crisis provided further scepticism.

Read the rest of this entry »