Is a new economic crisis that makes 2008 look mild in the offing?
Nouriel Roubini and Ian Bremmer argue in a lengthy survey of world gloom that the possibility of such a crisis is ever present unless world leaders find a way to restore order to a world that is teeming with political and economic risk.
Bremmer (left), the principal of the Eurasia Group of political risk consultants, and Roubini, an NYU professor and economist whose “Dr. Doom” appellation was freshly earned in this eight-page article in Institutional Investor, warn against a growing complacency that might mislead investors into thinking the “New Normal” economy is fading away.
Rather they argue that what they term “The New Abnormal” is ongoing, and may produce in the years ahead extreme levels of upheaval that we’ve seen in the past five years: instability that has brought about the worst economy since the Great Depression, challenges to viability of the Eurozone, the Arab Spring and the attendant Syrian civil war.
What makes our times abnormal is the lack of world order, which Bremmer and Roubini term the G-Zero—a period during which there is no big power with the ability or desire to impose geopolitical order amid crises or write the big checks that underwrite stability.
“The uncertainty and volatility of the past half-decade is far from finished—and is almost sure to trigger new crises,” the high-profile consultants write.
A key reason is that the world has failed to address structural issues that continue to fester and indeed ensure the resources to solve future problems may be absent when needed. Bremmer and Roubini (right) take readers on a world gloom and doom tour:
The United States, they say, has been lulled into complacency by greater volatility elsewhere, which has had the effect of making the U.S. and its dollar seem the “safest port in the storm.” As such, Democrats and Republicans have not felt the pressure to produce a grand bargain on spending, entitlement and taxes.
Similarly in Europe, the European Central Bank has used its monetary tools to take pressure off currencies in the periphery where there is austerity fatigue even as bailout fatigue takes root in Europe’s core.
On the BRICS front, China and India are avoiding crucial reforms to avoid short-term pain, and Brazil is not making the most of its current advantages, while authoritarianism runs rampant in Russia, and social cleavages threaten South Africa.
Compounding this increased level of volatility, the authors warn of a general disengagement in foreign policy: a post-Libya retreat by European powers, a Chinese politiburo with little interest in foreign affairs and a G-20 that only coordinates meaningful action under shared sense of severe threat, as last occurred in 2008 and 2009.
On the economic front, Bremmer and Roubini argue there has been no serious attempt to respond to the challenges of how to deleverage from high debt, deal with aging populations, impose structural reforms and step back from bloated welfare states.
“Advanced economies continue to face complicated challenges, but the policy responses that political officials have used so far—monetary and quantitative easing and fiscal stimulus that is now constrained by high debt levels—are Band-Aids applied to avert a near-term slide back into recession rather than a genuine effort to resolve long-term structural questions.”
Fiscally, the world is moving in the wrong direction, they warn, in not reducing liabilities and back-ending austerity. In monetary policy, central bank strategies are nationally oriented with a focus on depreciating currencies to boost exports—a trend that could make full-blown currency wars more likely.
“Advanced economies are now running out of policy bullets,” while at the same time setting the stage for new crises by creating asset inflation rather than real growth (through quantitative easing) amidst high debt that will leave no room for stimulus as a viable future policy.
Bremmer and Roubini regard emerging economies as prime potential trigger of future problems.
China is a case in point, they say. When it overtakes the U.S. in GDP, it will still be a developing country whose many problems—a shrinking labor force, aging population and degraded environment—will make its economic course volatile and thus roil the world economy.
Given the investor audience, the consultant duo launch into a macro view of winners and losers in the new abnormal.
Outperformers are countries that can make politically unpopular decisions and those with diversified economic partners. They rate Brazil, Chile, Colombia, Malaysia, Mexico, the Philippines and Turkey as having the best prospects, and India, Peru, South Africa and Thailand as having the worst.
They cite Canada favorably for its success at lessening its dependence on the U.S.
In the corporate sphere, the authors warn today’s environment is tougher for banks and investment banks: “Higher capital and liquidity ratios will reduce returns but will also slow credit creation and hamper growth,” adding that if economic tail risks materialize, there no longer exists the political capital for bailouts nor fiscal resources to rescue banks.
Ironically, the world’s best chance of coping with the New Abnormal would be an emergency that can induce world powers to cooperate on global problems.
While Bremmer and Roubini call out the usual suspects as crisis trigger—a new European financial meltdown or Mideast instability—they also speculate that the current credit and equity bubbles now in the making in the U.S. could be its source.
How the U.S. transitions from its current loose monetary policy will be key:
“Exiting too fast will crash the real economy, while exiting too slowly will first create a huge bubble and then crash the financial system,” they warn.
Bremmer and Roubini conlude that U.S.-China cooperation will be of paramount importance in coordinating a soft landing from the New Abnormal to the emerging world order.
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