New York University Professor Nouriel Roubini predicted the 2008 Financial Crisis and is now suggesting that 2013 will be a significant year for the world economy. He makes a number of claims which allude to a major economic catastrophe:
1. There is too much public and private debt worldwide – the US is running over a trillion dollar budget deficit.
2. US unemployment figures are high (9.1%) and the indications are that it will be a this level for a few years
3. The increase in oil and food prices. This leads to less disposable income becoming available for other goods and services
4. Rising interest rates in Asia
5. The Japanese earthquake which has disrupted world trade.
6. Stocks worldwide have lost more than US$3.3 trillion since the start of May
7. China’s economy may face a ‘hard landing’- there are concerns that it will have a lot of excess capacity as world demand dries up.
Here is a clip from Inside Job that has interviews with Nouriel Roubini
A new report shows U.S. employers added 192,000 jobs in February and the jobless rate fell to 8.9 percent. Jeffrey Brown – PBS News Hour – discusses the numbers and recovery prospects with former Labor Department Chief Economist Lisa Lynch and Nariman Behravesh, chief economist at IHS Global Insight, an economic and financial forecasting company. Companies seem to have a more positive attitude to the economy and exports are on the increase. However, with oil well above $100 a barrel there are fears that this could undermine the recovery. Well worth a look.
With the increasing unease in the financial markets around the world and the contraction of many leading economies there has been a resurgence in an unfashionable word -THRIFT. Recent years has seen consumer access to an unprecedented level of liquidity and many who borrowed heavily during this period are now tempted to repay debt and behave in a more prudent manner which, over the last few years, has been seriously out of character. As governments and central banks scramble to try and stimulate spending, by the lowering of interest rates and introducing various tax reforms, does this rise in thriftiness have serious consequences to politicians worldwide? Thrift can become very threatening to a nation. One only needs to turn the clock back on the Japanese economy to realise that a near zero interest rate in the mid 1990s had little effect on a thrifty consumer. Japan subsequently experienced a period of stagnant growth. Many countries today face a similar scenario and the need to keep consumers spending in difficult times is what John Maynard Keynes called ‘the paradox of thrift’. During the 1930s depression Keynes told an audience:
The best guess I can make is that when you save five shillings, you put a man out of work for a day. Therefore, O patriotic housewives, sally out tomorrow early into the streets and go to the wonderful sales which are everywhere advertised. You will do yourselves good … and have the added joy that you are increasing employment, adding to the wealth of the country.
However, with the downturn in an economy, it is a perfectly rational response for consumers to be more prudent in their spending especially with the threat of job losses. Although this might be a rational stance for the individual, it is highly irrational for society as a whole as economic activity is reduced which ultimately leads to business failures and job losses. Therefore by increasing saving, society ends up saving less because there is less income to save from. Economists call this the ‘fallacy of composition’.
What is clear is that this recession will have a psychological effect well beyond the facts and figures of income change and unemployment. It is not about thrift or updating of a thrift ethic rather changing the way you behave. However, are the words of Freddie Mercury and Queen still extremely relevant? “I WANT IT ALL AND I WANT IT NOW.”
Iceland’s economy was severely affected by the financial crisis as the banks expanded aggressively overseas following financial deregulation. The banks acquired investments that were greater in value than that of the country’s GDP and therefore were highly vulnerable if there was a run on the bank. Sure enough all three major commercial banks, Landsbanki, Kaupþing Bank and Glitnir went into administration in early October 2008. In fact there was a joke doing the rounds – “What is the capital of Iceland? 30 Krona” However, with easing inflationary pressures (has declined from 7.5% to 5.7% since May) and a stabilising currency (appreciated 4.6% against the US$) Iceland’s central bank cut its key interest rate by 1% to 7%. The interest rate had previously peaked at 18% in late 2008. Relative to the other major economies this key rate is still very high – see graphic below. However the Icelandic economy is still in a serious position. Credit rating agencies have indicated that the Icelandic government needs to settle a $5.5 billion dispute with the Netherlands and the U.K. over collapsed Internet bank Icesave or a $5 billion IMF funded aid programme might be withdrawn .
I picked this up from the New York Times website. Quite a quirky/country type song about the likelihood of a double-dip recession.
The New York Times had a great article on how the German economy has defied criciticism to record in the last two quarters economic growth of 2.2 percent, Germany’s best performance since reunification 20 years ago. In the aftermath of the financial crisis Germany was criticised for pursuing its own policy to combat the recession rather than the homogeneous financial stimulus of the US and other major economies. Their policy involved keeping workers in employment rather than having to deal with the economic and social issues of when they were out of work. Furthermore, by keeping wage inflation under control German industry could remain competitive with cars, engineering components etc being sold to the world economy. Part of this policy was the “short work” program to encourage companies to temporarily layoff workers or give them fewer hours instead of firing them. Workers would then be compensated for these lower wages by increments when the company books improved during good times. Click here to see the full article from the New York Times.
Great graphic that looks that the different economic cycles. L = once a recession bottoms out, a return to pre-recession output and activity will take a long time. U = the rebound will be a gradual process of expanding economic activity. V = a very rapid rebound. W = downturn followed by a sharpe recovery which then leads to a rapid downturn again – often referred to as a double-dip recession. Click here to download the image below.
A lot of media commentators think that the US is heading this way. Ben Bernanke (Chairman of the Federal Reserve Bank – equivalent to Alan Bollard at the RBNZ) is worried about this as bank credit is drying up, 10m jobs have been lost in the last 3 years, and there are a huge number of foreclosures on properties. Furthermore, it is usual that labour markets recover quickly when then is an upturn in the economy. Bernanke admitted that there wasn’t sufficient growth to rectify the labour market – unemployment is now 9.5%. Paul Krugman (Nobel prizewinning economist) said “we’ve been here before – 1937 when a return to growth in the US economy was stifled by premature increases in interest rates”. See the image below.