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Mainstream, VOL L, No 35, August 18, 2012

World Economy: Darker Days Ahead!

Monday 20 August 2012, by Girish Mishra


Next year, that is, 2013, is going to witness a terrible economic tsunami which will bring the global economy to a complete halt. This prediction is not from any mad man but a well-respected economist, Nouriel Roubini, a Professor at the Stern School of Business of the New York University. He also heads a consultancy firm, the Roubini Global Economics.

Roubini, born in Istanbul on March 29, 1959, is a Jewish of Iranian origin. He was educated at Boccioni University, Milan (Italy) and Harvard University, USA.
He came to limelight after his prediction, made at a meeting held on September 7, 2006 under the auspices of the International Monetary Fund in Washington, D.C., came true in 2008. He had, with a great deal of self-confidence, emphatically forecast the coming of a long spell of recession. This stunned not only the audience but also the economists and policy-makers all over the world. A number of them dismissed off-hand his claim as nothing but absurd. The reason was simple. At that time, the American economy appeared to be robust so much so that it was claimed to be in a golden age. Roubini predicted that those who had purchased houses on mortgage were not going to be in a position to pay their installments and this was sure to lead to the collapse of the American economy and, sooner or later, its impact would be felt all over the world.

During the initial days of 2008 when the Great Recession had set in, most economists in America and other Western countries termed it as temporary and asserted that it was caused by the shortage of liquidity which could be overcome without much difficulty. They were, however, proved wrong and Roubini was vindicated. The process of the economic collapse of households, corporations and financial firms that began then is still continuing unabated. Roubini had warned that Wall Street would lose its traditional sheen and age-old influence. Within a few months, giant corporations like Bear Stearns and Lehman Brothers went under and Merrill Lynch was gobbled up by the Bank of America. The General Motors became bankrupt. Elsewhere in the Western world a number of corporations met the same fate. China and India, too, were adversely affected though they managed to grow economically, albeit at slower rates.

Whatever has been said above rubbishes the statements of the then American Vice-President, Dick Cheney, and the British monarch, Queen Elizabeth II, that no economist could predict the impending catastrophe. To recollect, more than two-and-a-half years after the prediction by Roubini and more than one year of the beginning of the Great Recession, Cheney was still living in ignorance. To quote from Crisis Economics: A Crash Course in the Future of Finance, authored by Nouriel Roubini in collaboration with Stephen Mihm (Allen Lane, 2010), “In January 2009, in the final days of the Bush Administration, Vice-President Dick Cheney sat down for an interview with the Associated Press. He was asked why the Administration had failed to foresee the biggest financial crisis since the Great Depression. Cheney’s response was revealing. ‘Nobody anywhere was smart enough to figure [it] out,’ he declared, ‘I don’t think saw it coming.’”

Cheney was not alone in this belief. On November 5, 2008, Queen Elizabeth II of Britain, while opening the new academic building of the London School of Economics, expressed her dismay at the state of economic science in the sense that no one could foresee the coming storm. According to a British daily, The Telegraph, her personal fortune had declined to £ 295 million from £ 320 million in April 2008. Months later, in the last week of July 2009, a group of British economists wrote a three-page letter to the Queen, blaming a “failure of the collective imagination of many bright people”. Luis Garicano, to whom the Queen had directed her question during her visit to the LSE, said: “I think the main answer is that people were doing what they were paid to do, and behaved according to their incentives, but in many cases they were being paid to do the wrong things from the society’s perspective.” A very sad state of affairs, indeed! When the Queen visited the LSE, Garicano was the Director of the Research Management Department.

The main reason for most economists’ inability to forecast the impending reality was that they were in the grip of neoliberal economic thinking that had emphatically ruled out ups and downs or booms and slumps. In other words, their vision had got blurred. They were under the illusion that self-regulated markets would keep the economy crisis-free.

WITHOUT straying further into the debate relating to neoliberalism, let us return to Roubini. Soon after the onset of the Great Recession, he came to be called “Dr Doom”, “Perennial Pessimist” and so on. Reviewing his above-mentioned book in The New York Times (May 6, 2010), Michiko Kakutani, underlined that Roubini’s prediction had come stunningly and frighteningly true as the entire global financial system teetered on the brink of abyss. “Cassandra had belatedly become a much celebrated prophet.” Basing himself on Keynes and Schumpeter, Roubini asserted that the Great Recession was the result of deeper, more tectonic pressures.
Now the same “Dr Doom”, in a television interview to Reuters, has predicted that 2013 is going to witness a “perfect storm”. He has underlined five factors that are going to dash all hopes of recovery and bring the world economy to a standstill. These factors are: (1) the worsening debt crisis in Europe, (2) tax increases and spending cuts in the US that may push its economy into further recession, (3) a hard landing for the Chinese economy, (4) slowing of the pace of economic growth in emerging markets including India, and (5) growing danger of military confrontation between the US and Iran. To quote Roubini, “Next year is the time when the can becomes too big to kick it down (the roads)… then we have a perfect global storm.”

Roubini in his article “American Pie in the Sky”, distributed by Project Syndicate on July 20, 2012, has elaborated all the above-mentioned points and rejected the claim that the US economy is not only fast coming out of the abyss but is also “on the verge of a robust and self-sustaining recovery that would restore above-potential growth”. This optimism has turned out to be false “as a painful process of balance-sheet deleveraging—reflecting excessive private sector debt, and then its carryover to the public sector—implies that the recovery will remain, at best, below-trend for many years to come”.

The current year was supposed to register economic growth at the rate of more than three per cent but the data for the first half indicate that it may not exceed 1.5 per cent, even lower than the rate of 1.7 per cent registered last year. “And now, after getting the first half of 2012 wrong, many are repeating the fairy tale that a combination of lower oil prices, rising auto sales, recovering house prices, and a resurgence of US manufacturing will boost growth in the second half of the year and fuel above-potential growth by 2013.”

Roubini adds: “The reality is the opposite: for several reasons, growth will slow further in the second half of 2012 and be even lower in 2013—close to stall speed.” In spite of all the claims of more job creation, unemployment is high.

Increased taxes and slashed expenditures have adversely affected the volume of demand for goods and services during the first half of the current year. There is some political uncer-tainty, arising from the impending presidential election, too. It is feared that this uncertainty may pull down the rate of economic growth in 2013 to just one per cent.

Whatever increase in consumption expenditure has been registered has not been due to increased wages but owing to tax reductions and increased transfer payments. These two sources are likely to dry up in the coming months, aggravating the situation. The weaker growth rate will surely adversely impact the stock market.

Since the American economy is the largest in the world and if it contracts, it will impact the economy of the rest of the world. If it begins sneezing, the rest of the world is sure to catch pneumonia. It is needless to add that developing countries like India will have serious social and political implications. It is high time that they look into the neoliberal dispensation and globalisation based on it, accepted and implemented by them since the early years of the 1990s.

The author, a well-known economist, used to teach Economics at Kirorimal College, University of Delhi, before his retirement a few years ago. He can be contacted at:

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