Gloomy Roubini Takes On Upbeat Milken at Global Economy Forum

The trouble at the national level, Milken said, was that euro zone countries lacked the independence to devalue their currencies. For humorous effect, he handed Roubini a one-million lira coin from Italy's postwar inflationary period, followed by a hundred-trillion Zimbabwean dollar note.

Roubini acknowledged the corporate sector was doing well. "But let's think about the balance sheet of the rest of the economy," he countered, noting that in the U.S. and Japan as well as Europe, household debt remains high. "One sector, corporate, is doing well," he said. "All others are shaky."

And while corporations are sitting on mountains of cash, they are not spending it amid economic and regulatory uncertainty, Roubini said. Moreover, since governments are in trouble, eventually they will have to boost taxation, and that will adversely affect growth in the corporate sector, he said.

Roubini called for "a massive real depreciation of the euro," which he said was overvalued by about 30%. He called Germany "ubercompetitive," and said deflationary trends in prices and wages will lead to depression, political instability and eventually a break-up of the euro zone.

The final topic of discussion and disagreement was the U.S. economy, where Milken was cheered by the performance of the stock market, which he said has increased in value by tens of trillions of dollars since 2008. Roubini countered that savers have gotten zero percent returns on Treasuries over the last 10 years, adding the average American must be thinking "How am I going to retire?" especially when "Social Security is bankrupt and corporate pension plans are totally unfunded."

"My worry is that we have kicked the can down the road," Roubini said. "Real wages are not growing; they're flat and actually falling." He also noted the "fiscal cliff" the U.S. faces if all the Bush-era tax cuts are allowed to expire, which he thought unlikely. Still, a likelier smaller withdrawal of stimulus will cut GDP growth in half, he said, sending the U.S. back to "stall speed" from its current lackluster 2% growth rate.

Roubini lamented the political gridlock in the U.S., saying even after November's presidential elections, and regardless of who wins, the Republicans will have enough political strength to veto tax hikes and the Democrats will have enough power to veto any entitlement reform. He got the biggest laugh of the session when he asked, rhetorically, "Do you think the two parties will come together for the good of the country?"

Milken remained upbeat, praising the strength of U.S. financial institutions and detailing the promise of energy and health sector innovation and increased immigration. "The challenges are so well laid out," he said, calling for U.S. leaders to inspire Americans, as Kennedy did, to ask themselves what they can do for their country.

Roubini was unimpressed, noting the U.S. is still growing beneath trend, unemployment is above 8% and growth is only 2% despite a surge in U.S. government spending from the stimulus. "We have to survive the short run to get to the bright spots in the long run," Roubini told Milken.