Dr. Doom Warns of “Double-Dip” Recession

You see Nouriel Roubini’s name in the news a great deal lately, and more often than not, he is warning of a “double-dip” recession that he believes is our combined fate. No, there is no “V” or “U” curve recovery for Mr. Roubini – he is of the “W” curve school and he believes that we have merely reached the mid-point of this fickle letter.

This of course begs the question, “does Roubini know what the heck he is talking about?” Well, he is currently a professor of Economics at the Stern School of Business; he has worked with the International Monetary Fund and the Federal Reserve; he also served on the Council of Economic Advisers for the Clinton Administration before moving on to the Treasury Department under Timothy Geithner. Oh, and he also called the collapse of the US housing market, saying how it would trigger a world-wide recession.

Back in September 2006, Roubini warned that “The United States was likely to face a once-in-a-lifetime housing bust, an oil shock, sharply declining consumer confidence, and, ultimately, a deep recession”. OK – so it seems he got that all pretty-much right, but other economists also warned of an impending housing bubble; however, Roubini was so vociferous, and so shrilly did he sound the alarm, that he was especially singled-out by the nay-sayers as being an overly-pessimistic “permabear”. He was even ridiculed by the New York Times who famously labeled him as “Dr. Doom”.

Despite the growing optimism generated by the news that several economies including Japan, Hong Kong, France, and Germany all posted positive growth in the past week, Roubini still believes this rally is doomed. In a commentary published in yesterday’s Financial Times, Roubini defended his position on two key points; the winding-down of government stimulus spending, and the rapid rise in energy prices.

Roubini believes that much of the recovery we have seen to date, is directly attributable to government stimulus spending that in itself, is not sustainable. Worse still, this flurry of spending has forced many governments into a deficit position resulting from not just an increase in spending, but a dramatic reduction in tax revenues stemming from lower personal incomes and weak consumer and business spending.

Policymakers are – as Roubini describes them in yesterday’s article – “damned if they do and damned if they don’t”, and sooner or later, governments will be forced to address their operating deficits through some combination of tax increases and reduced spending. If this indeed is the case, it is inevitable that the fledgling recovery will be impacted to some degree, with the very strong likelihood that the economy could be pushed back into a recession.

What if governments simply choose to ignore the rapidly accumulating debts? The danger here of course, is that bonds yields will be pushed higher, leading in turn to higher borrowing costs and giving rise to increased inflation. This combination of low productivity and high inflation could actually lead to the most dreaded of all conditions – stagflation!

And then there is the little matter of oil prices. Once again – just as we saw last year, oil prices are on the rise fuelled much more by speculation than by economic fundamentals. Roubini believes that the economy cannot stand another energy shock and should prices get near the $100 a barrel mark again, the rather “anemic” recovery we are seeing now will soon be replaced by another bout of negative growth – or as Dr. Doom calls it, the “double dip” of recession.

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