BackNouriel Roubini sees asset bubbles bursting in a few years
Roubini says cheaper crude oil, gold may not lead to equities doing well because of China growth scare
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Mumbai: Economist Nouriel Roubini, who predicted the US housing market bust that led to a global financial crisis, said on Wednesday that lower crude oil and gold prices may not lead to equities doing well because of the growth scare in China. The chairman of Roubini Global Economics said quantitative easing by global central banks was creating new asset bubbles. Edited excerpts of what Roubini said on the sidelines of the World Trade Centers Association programme in Mumbai:
On monetary easing
Economic growth is fragile in advanced economies. There is recession in the euro zone and the UK, there is economic weakness in Japan and even in the US, given that the excessive fiscal drag is slowing down. Since fiscal policy is constrained, everybody is doing austerity in the periphery of euro zone.
Given that there are downside risks to growth in advanced economies and that the fiscal tool is constrained by large deficit and debt, the only macro policy tool available to reduce the fiscal risk is the monetary one. Monetary easing is necessary and is desirable because it reduces fiscal risks and increases asset reflation over time.
This may be beneficial to reduce the risk of recession or disappointing economic growth.
On global economy
I do not expect a recession in the US. The effect of the fiscal drag on growth is going to be significant. Between raising taxes and cutting spending through sequester, you have a fiscal drag which is probably close to 1.5% of gross domestic product (GDP) and I expect the US economy to grow this year below trend at 1.6% or 1.7%. I do not expect a double-dip recession. The situation is different in Japan. It has several quarters of negative growth, recession and ongoing deflation. What the government is doing right now is restoring ambition to do monetary and fiscal stimulus to stop deflation, jump start the economic growth, weaken yen and boost stock market.
The monetary and fiscal easing is necessary. But, on the other side, over time Japan will have to think about doing fiscal consolidation because debt is high and unsustainable. If Japan wants to grow faster, it will have to do structural reforms to liberalize the economy and trade. As long as Japan does all the steps such as monetary and fiscal easing, structural reforms and trade liberalization there is a chance that things will work out. Instead, it Japan does only monetary and fiscal easing and does not focus on structural reforms and trade liberation, the monetary easing effects will fizzle out.
On the proposed BRICS bank
Well, BRICS sort of agreed to create the bank that could provide funding for productive investment to BRICS and other emerging markets. The details of that bank are still very fuzzy: Where will it be located? Who will provide most of the capital? Talks of the BRICS bank are a signal that emerging markets are somehow tired about global and financial institutions such as International Monetary Fund and World Bank where the executive boards are still controlled by advanced economies. They want to create a financial institution on which they have greater control. That in some sense is a negative signal because until now approach to financial stability has been driving global institutions, rather than the regional ones.
BRICS are non-homogenous types of countries and economies. Some have political systems which are democratic like India, Brazil and South Africa and some of them are authoritarian like Russia and China. Again, some of them have comparative advantage in goods like China and services like India. It is not a very homogenous group and we need to see whether the BRICS bank is going to materialize and be successful.
On fall of gold and crude prices and future of equity
It’s not clear because the reason why commodity prices are falling is global growth scare and weaknesses in the euro zone, the UK and in Japan and now slowdown in US growth. There is also growth scare coming from the fact that China is showing signs of slowing down and other BRICS countries are also having weak economic growth. If that growth scare is more than a scare, that is going to affect the earnings and profitability. That is going to actually be a negative for the US and other global economies.
On quantitative easing and asset bubbles
It is hard to predict bubbles and their bursts, but I would say that we are having tension in the US and the global economy. On one side, growth is weak in advanced economies and unemployment rate is high and that justifies more quantitative easing. Existing quantitative easing and zero policy rate very slowly will try and support recovery but on the other side, a lot of this liquidity is not creating credit for the real economy and is going into asset prices, greater risk taking and greater leveraging into the financial system.
There is already frothiness in the asset market in the US and over time low rates are going to cause credit, asset and equity bubbles which may become dangerous. Not today, but certainly three to four years of zero policy rates will lead to that. There could be a repeat of the cycle which we had seen between 2004 and 2008 when real economy weakness justified keeping rates low for longer and exiting from those low rates slower, but that attempt to stabilize the real economy created financial instability and frothiness that led to a bubble which eventually busted.
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