Nouriel Roubini: Radical Solutions for a Crazy Economy

[marmar]

via AlterNet:



Radical Solutions for a Crazy Economy

By Nouriel Roubini, Forbes. Posted November 28, 2008.

The fight against a deadly combination of stagnation/recession and deflation has to be unorthodox.



The U.S. economy is confronting a toxic mixture: deflation, a liquidity trap and debt deflation, as well as rising household and corporate defaults. Put plainly, the signs of a "stag-deflation" -- a deadly combination of stagnation/recession and deflation -- are now clear.

We are in a severe recession, and now the recent readings of both the Producer Price Index and the Consumer Price Index show the beginning of deflation. The slack in goods markets -- with demand falling and supply being excessive (because of years of excessive over-investment in new capacity in China, Asia and emerging market economies) -- means firms have lower pricing power and a need to cut prices to sell the burgeoning inventory of unsold goods.

The slack in labor markets means lower wage pressures and lower labor-cost pressures; and the slack in commodity markets -- that have already fallen by 30% from their summer peaks and will fall another 20%-30% in a global recession -- means lower inflation and actual deflationary forces.

The Risk of a Liquidity Trap

When deflation sets in, central banks need to worry about it -- and worry about a liquidity trap. Take the example of the 2001 recession: That was a mild eight-month recession in the U.S. and was over by the end of 2001. But by 2002, the U.S. inflation rate had fallen toward 1%. The Fed was forced to cut the Fed Funds rate to 1% and Ben Bernanke (then a Fed Governor) was writing speeches titled "Deflation: Making Sure "It" Does Not Happen Here."

So if a mild recession that was not even global led to deflation worries, how severe could deflation be in a recession that even the IMF is now forecasting to be global in 2009? .......(more)

The complete piece is at: http://www.alternet.org/workplace/108958/radical_solutions_for_a_crazy_economy/

[4dsc]

1. Next year is really going to suck

I wonder how many people are paying attention to those people claiming that 2009 is going to be a worse year than 2008 economically??

[Demeter]

2. My Suggestion: First, We Give All The :"Financiers" FRS Packages

(French Revolution Severance)

Then we bring home the jobs and reopen manufacturing and service at home.

Universal single payer health care and update Social Security and the tax code.