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.