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Ferguson, Roubini vs. Krugman: Slowdown or Depression for The U.S.?
By Dian L. Chu
Paul Krugman, a strong supporter of fiat money, is obviously having a major distress over the G20 push to cut deficits in half by 2013, and stabilize the soaring U.S. debt. In his latest New York Times column, Krugman not only criticizes austerity measures, but also asserts that we are in the early stages of a third depression as a direct result of the spending cut.
Perhaps because Krugman beat him to the punch with this ultimate Doomsday op-ed piece, on this very rare occasion, Dr. Doom--Nouriel Roubini--is actually a lot more optimistic about the economy in the United States when he spoke with CNBC last night. (watch the clip here.)
Roubini - No Recession in The U.S.
In The Kudlow Report, Roubini says he does not see a double-dip recession in the U.S. Rather, the U.S. will experience a slowdown of around 1.5% GDP in the second half of this year, after growing 3% in the first half, he says.
At the same time, keeping up with his Dr. Doom reputation, Roubini does see a recession coming in the euro zone and Japan. There is a risk of a contagion effect to the U.S., which could lead to further correction in stock prices with a double-dip in Europe, Japan "falling off the cliff", and evidence of a slowdown in China.
Meeting Krugman sort of halfway, Roubini thinks fiscal austerity is needed in Greece, Spain and Portugal, whereas countries like Germany, Japan, China, should be doing fiscal stimulus.
Ferguson Worries about Europe Banks & U.S. Fiscal
Roubini's view is also shared by Harvard University professor--Niall Ferguson--who told CNBC in a separate interview that
"Right now the picture is definitely bleaker in Europe than it is in the US....I agree with Nouriel on this, it's not as if the US economy will contract, it will grow at a slower rate."
In addition to the debt woes in Europe, Ferguson is "nervous" about European banks, which were more leveraged than US banks. He noted the European governments do not have "very deep pockets" as most people have assumed, and Greek crisis revealed the limit of this largesse.
Even though compared with the euro zone, the economic picture in the U.S. does look relatively better; Ferguson said the horrendous fiscal situation means the US is likely to be faced with tough measures to cut the deficit over the longer term.
My Take - Difficult Balancing Act
Based on my biflation analysis, I believe the risk of deflation, not to mention depression, is highly overstated. As such, I don't see the U.S. going into another recession either, albeit slow and anemic growth into 2011 or 2012.
On the other hand, the U.S. deficit situation; however, is not something that may be rectified by more spending as suggested by Krugman.
Bloomberg's chart published on June 4 (below) shows the U.S. government’s total debt, which rose past $13 trillion for the first time this month, will surpass GDP in 2012, based on forecasts by the International Monetary Fund (IMF).
In a report for the Toronto summit, the IMF suggests "growth-friendly" policies such as shifting from income and payroll taxes to consumption taxes. In the United States, that might mean adopting a value-added tax (VAT) of up to 8% on all goods and services.
In the state of Texas, where there's no state income tax, the sales tax rate in the City of Houston is already at 8.25%. So, from my perspective, VAT would seem a path of least resistance to raise revenue than an income tax add or hike.
The idea of a VAT actually has gained some traction, including President Obama's Economic Advisor, Paul A. Volcker. However, the recent debate in Washington has become more focused on cutting Social Security, health benefits, defense spending and a freeze for other government programs.
Meanwhile, the employment malaise (see chart) suggests we might need a second stimulus spending since the first one was basically squandered away, as far as job creation is concerned. But Congress will likely balk at the added expense in an election year.
So, from all indications, it seems the U.S. most likely will only start slashing spending and implementing necessary measures--with some degrees of urgency--when coming under pressure from bond markets, similar to Greece and Spain.
Fortunately and unfortunately, one luxury of being such a big spender is that the U.S. practically holds its debtors hostage.
Nevertheless, the day of reckoning could be coming, probably as soon as the euro zone comes out of this crisis....one way or another.
Quote of the Day:
"People like Krugman living in glass towers at the New York Times or Princeton University need to understand that deficits do matter."
~ Niall Ferguson
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To say that the national debt is approaching 100% of GDP is simply ludicrous. It ignores the GSE debt guaranteed by the treasury, 6 trillion+, and entitlement promises that are close to 100 trillion. Is there some convention that forces economists to ignore obvious but unwelcome facts?
Yeah... it's called the I-want-politicians-to-keep-taking-my-phone-calls fudge factor.
I guess it's not really part of their job, but economists always assume a static state of global events. That in and of itself pretty much makes their work worthless, I think. That's probably why economists are held in such distain. What good is a prediction that cannot, by its very nature, assume extra-ordinary influences?
You know the drill: GoM, Katla, N Korea, Iran, Home-bred socialism, an over-active sun, roits, ... Hell, Brangelina might even reconcile. And then who knows what will happen?
I'm not exactly sure why we listen anymore.
Jeezus, Louisus!
Krugman is more bearish than either 'Dr Bah- bul' and Nial Ferguson? This must represent some kind of 'top' somewhere. Mebbe I should open a stock brokerage account and simply 'short' something. Anything!
According to the ZH brain trust I should simply buy gold. It's like going to the post office. The dude behind the counter invariably tells me I should rent a post office box.
I already rent a post office box ...
'Austerity' and 'deficits' are the buzzwords of the now. The establishments are running around like their balls are on fire. They mislead the public. Krugman is half- right, the other two have lost their minds (about growth in the US). The Europeans are in boiling water right along with the US ... and all the rest of the industrial powers and powers- to- be.
- Europe has deficit/borrowing problems because individual member states must borrow in what is essentially a foreign currency - the euro. These countries cannot devalue the euro in order to rebalance their economies. Their only method is to internally devalue by firing staff and cutting wages. The outcome is the deflationary spiral where means to pay debts decline faster than do the debts themselves. Witness Ireland's account in the New York Times a couple of days ago. Without a change in europolicy, the continent will abandon the euro or it will fall into depression. (It will probably do both.)
- The US does not have the same deficit/borrowing problems as Europe as it makes its own dollars and its debts are denominated in dollars. It therefore can make as many dollars as are required: to create new debt to pay off old debt. There is no limit to this other than relevance and politics. A forty- gazillion- trillion dollar deficit is foolishness, but so is shredding the safety nets and making poverty official policy.
- The entire issue of austerity orbits around finance raping the public in the name of 'sound money'. It is simply feudalism brought forward. The US just witnessed the end of long- term unemployment benefits for jobless. The businesses that depended on those jobless customers have been given the finger along with the out- of- workers themselves. For what, exactly? Political talking points by neo- nazi Repugnicons who associate with the finance elite - which pay for their 'elections'? I guess I answered my own questions.
- What is happening is hard money in action: the demand for cash dollars in preference over dollar- denominated credit. We are in the very beginnning of this shift in preference which is historic. Credit became preferred over cash in the US beginning in the 1960's with the Vietnam war and its massive cost. Americans wanted both prosperity and victory. Bretton- Woods was jettisoned and US oil production peaked. We started charging the American dream rather than earning it. Foreign oil and credit fueled our long- term 'lifestyle' cycle.
No longer.
- Unlike gold which is not a part of day to day life, US currency is becoming aligned with crude oil which is a part of everyday life. Did you fill up the tank this morning? Did you drive to work? The dollar is fully exchangeable for oil on demand at a stable price. This makes the dollar a defacto hard currency backed by crude oil. This currency hardening is taking place right under the noses of the hard- money shysters without them paying any attention! Is the world ironic or what?
- All the gold bugs will get what they most desire; a currency that is more valuable than the goods and services it is supposed to be exchanged for. If Ferguson and Dr Bah Bul can't see the outcome of this process they should quit appearing in public and both get jobs @ Home Depot. People hoard hard currencies. The hoarding process is self- reinforcing. The endgame is widespread poverty. How this reconciles with GDP growth is hard to figure out. Dr Bah Bul?
- Right now the US is suffering a net outflow of increasingly valuable money overseas by way of millions of gas tanks. Much of what is transpiring in the finance ambit is the attempts by both energy producers and the consuming nations to grab as many cash dollars as possible. This is creating painful choices; the Continent can compete with the US by making its own currency harder by means of deflation and the collective ruin of its citizens. This is ongoing while the fuel shortfall - peak oil - creates deflation in the US and increases the hardness of the dollar at the same time. Dollar preference is giving both China and Japan the bends. Both gobble increasing amounts of oil that are paid for with dollars. Their reserves evaporate at the same rate as does gasoline.
The next step is credit revulsion and cash preference. Treasuries are expensive now but when countries and funds start looking for the next tranche of cash they will all start selling Treasuries. Look for China to become a net seller of Treasuries. This will indicate that it has less available cash reserves than people like Krugman, Ferguson and Dr. Bah Bul believe. This will mark the implosion of the China property bubble and the payoff of Chinese finance insiders - who are also political insiders. Since China runs basically a command economy, the likely outcome is inflation. The indicator for this will be if Beijing allows dollars to circulate within China.
Ditto Japan, which has used Treasuries as a hedge against rising fuel costs. Who will buy Treasuries? The real question; will austerity in the US be an option?
All the above 'analysts' are myopic. None see the energy connections and believe credit - which is an energy analog - to be the answer for every question. Between more difficult debt sales and ever- increasing real fuel costs the outcme is going to be forced austerity pretty much everywhere. The issue is who is going to suffer most? A sensible policy would include energy conservation - which is cheap, always works and is simple to implement - support for those at the bottom of the economic food chain and to jettison the finance jockeys and their rent- seeking.
What about it, Dr Bah Bul?
Great post.
That was really good writing.
Why not a sales tax, why a VAT. A VAT only serves to hide the true tax being paid. It was invented to to increase compliance, that is it's only purpose.
The Europeans realize this and openly avoid this tax by cash transactions and bartering...Some say that the great coming inflation is planned so that only electronic transactions can be used (as the value of currency will be fluctuating rapidly- the opressors will go electronic)
What's all this fuss about a "double-dip"? There's been only one dip and it's still here. Variations in the level of "dip" do not mean we are no longer in one.
Time to shut down the US Federal Reserve?
By Ambrose Evans-Pritchard
"As for the Fed, I venture to say that a common jury of 12 American men and women placed on the Federal Open Market Committee would have done a better job of setting monetary policy over the last 20 years than Doctors Bernanke and Greenspan.
Actually, Greenspan never got a Phd. His honourary doctorate was awarded later for political reasons. (He had been a Nixon speech-writer). But never mind."
http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100006729/ti...
On the same subect, big article yesterday:
Die Deflationsbären sind los ( Deflation bears are out )
Albert Edwards, David Rosenberg und Paul Krugman sind sich einig: Der Weltwirtschaft droht ein gefährlicher Verfall der Preise. Nobelpreisträger Krugman spricht sogar von "dritter Depression" nach 1873 und 1929. Anleger flüchten in Anleihen und Gold.
http://www.ftd.de/finanzen/maerkte/anleihen-devisen/:duestere-prognosen-...
Deflation benefits savers. Inflation benefits debtors. That's it, that's all.
Consumer debt means that households have promised their future production (share of GDP) in exchange for consumption now. The most extreme of this is borrowing to take a vacation (hah!). The trouble with promising future production against current consumption is that current production (GDP) does not automatically expand to adjust to that increased current demand. This forces prices up in that area of consumption that is most in demand.
The rule is simply: If you make cheap money available (as debt) against any good or service, that good will rise in price. Think of : education, cars, houses - and the point becomes clear.
Sooner or later, the debt has to be paid back. Sooner or later, there has to be a reduction in the standard of living because our production at that future time will be owed to others and will not be able to be used to exchange for goods and services. The longer we wait to address those debts, the worse the adjustment will be. There is no free lunch, but in the future there may not be a lunch at any price because we will have already consumed it in the past.
Thank goodness that time travel is impossible, or our future selves would be back here right now kicking us for being so stupid and short-sighted as to doom them to a penury existance as debt slaves.
Krugmn right
Roubini wrong
I never thought I would type that.
With 13% deficit spending goosing the economy, all we get is "anemic growth" of 1.5%? LOL -- sounds like a depression to me.
Velocity of money is exceedingly slow and for every dollar spent by gov/fed in they get only a few pennies out.
In other words: FUBAR
So from this we are to believe that the Us is better off than europe
right now the market is concentrating on europe thats all
if youy look at the fndamentals The us is worse off
in so many ways
California is another Greece but way bigger
The us holds the reserve currency so the market will atek care of it last
thats all
its A TICKING TIMe bomb
"In the United States, that might mean adopting a value-added tax (VAT) of up to 8% on all goods and services."
So, government expenditures (increasing the deficit) are offset by a tax on all goods and services???
All this does is soften the decline into lower standards of living as deficits continue to rise out of control.
This is hardly a solution.
The number of people requiring support is growing faster than the amount of support is growing...