 "Dr.Doom says asset price inflation could be next bubble to burst")
Economist Dr. Nouriel Roubini, Chairman, of Roubini Global Economics, famous for predicting the global financial crises, believes that the current regime of low interest rates could result in money going to asset price inflation rather than doing good in the real economy. An extended period of such easy credit could eventually lead to an asset bubble with an unhappy ending, he said in a media interaction on the sidelines of Plenary Session of the 44th General Assembly of the WTCA, New York. Edited Excerpts:
Can you predict when the next bubble will burst?
It is hard to predict bubble and the bursts. But I would say that on the one side the economic growth is weak in the advanced economies, unemployment is rate is high thus justifying more quantitative easing and keeping interest rates at zero for longer. Everything from quantitative easing to zero policy rates is tried to support incomes, jobs and productions. On the other hand, a lot of this liquidity is not creating credit for the real economy; it is going into asset price inflation and adding to the leveraging in the financial system. The normalisation of these policy rates at zero could imply that one or two or three years from now, we have already seen effect of this on asset markets, prove to be a bubble. And eventually that boom and bubble could actually down the line lead to a burst or a crash.
It is not clear, because the reason why the global commodity prices are falling now is because of global growth scare because of weakness in the Euro Zone, UK in Japan and slowing growth in the US. And there is also a growth scare coming the fact that China now has shown the signs of slowing down. And other BRICS are also adding a weak economic growth. So if growth scare is more than a scare, that's going to have negative impact on the earnings and profitability and thus that's going to have negative outlook for the US and global equities. On the other side however if there is growth weakness leading new rounds of monetary and quantitative easing by global central banks keeping other things equal, the liquidity searching for higher yield may enter into the US and other global equity markets. Higher liquidity will cause asset price inflation. But if liquidity spreads because of the downside risk to global economic growth and if the downside risk to growth actually materialize, in spite of liquidity, than you could over time have a correction in the global equities.
What are the economic risks in some of the advanced economies?
Economic growth is fragile in advanced economies. There is a recession in the Euro zone, in the UK(United Kingdom). You still have economic weakness in Japan. And even the United States, the fiscal drag is slowing down growth. And also fiscal policy is constrained because now everybody is doing austerity, in the periphery of the Euro zone, in the core of the Euro zone, in the UK, in the US.
What Is Your Outlook on the US?
Well I do not expect a recession in the United States. What’s happened in the US however, is that the effect of fiscal drag on growth this year is going to be significant. Between raising taxes and cutting spending through the sequester, you have a fiscal drag that is probably close to 1.5% of GDP, and that’s why I expect the US economic growth to be reasonably mediocre and below trend, at 1.6 per cent, maybe 1.7 per cent. I don’t expect a double-dip recession.
What about Japan?
Japan has had last year several quarters of negative growth and recession and ongoing deflation. And what the government is doing right now is through an ambitious effort at monetary and fiscal stimulus, to try to stop deflation to try to jump-start economic growth, to weaken the yen, to boost the stock market and have stronger economic growth and stop the deflation.
Over time, Japan will also have to think about doing fiscal consolidation because their debt is high and eventually unsustainable. It also needs to do structural reforms to liberalise the economy and further trade liberalization like joining the trans-pacific partnership in order to increase potential growth.
How credible do you find the idea of BRICS Bank?
The BRICS have sort of agreed that they want to create a BRICS bank which could provide funding for productive investment both in BRICS and in other emerging markets. I think the details of that bank are still very fuzzy, where that is going to be located who is going to provide most of the capital, which kind of investment, what is the size of it.
This could also be a negative thing, because until now the approach to financial institutions is towards having global financial institutions rather than having regional ones.
What are some of the things that stand in the way of a BRICS Bank?
The BRICS are very diverse with some of them having democratic political systems like in India, Brazil South Africa. There are also differences in that countries like Russia, Brazil and may be South Africa are more resource exporting countries. Other like China enjoys competitive advantages and some of them are more service oriented like India. Some of them are more open to trade and foreign direct investments. So there exists very meaningful political and economical differences within these countries. We will have to see if the BRICS bank is going to really materialize and is successful or not.
Can you predict when the next bubble will burst?
It is hard to predict bubble and the bursts. But I would say that on the one side the economic growth is weak in the advanced economies, unemployment is rate is high thus justifying more quantitative easing and keeping interest rates at zero for longer. Everything from quantitative easing to zero policy rates is tried to support incomes, jobs and productions. On the other hand, a lot of this liquidity is not creating credit for the real economy; it is going into asset price inflation and adding to the leveraging in the financial system. The normalisation of these policy rates at zero could imply that one or two or three years from now, we have already seen effect of this on asset markets, prove to be a bubble. And eventually that boom and bubble could actually down the line lead to a burst or a crash.
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Money is moving out of gold and entering into equity. Comment.
It is not clear, because the reason why the global commodity prices are falling now is because of global growth scare because of weakness in the Euro Zone, UK in Japan and slowing growth in the US. And there is also a growth scare coming the fact that China now has shown the signs of slowing down. And other BRICS are also adding a weak economic growth. So if growth scare is more than a scare, that's going to have negative impact on the earnings and profitability and thus that's going to have negative outlook for the US and global equities. On the other side however if there is growth weakness leading new rounds of monetary and quantitative easing by global central banks keeping other things equal, the liquidity searching for higher yield may enter into the US and other global equity markets. Higher liquidity will cause asset price inflation. But if liquidity spreads because of the downside risk to global economic growth and if the downside risk to growth actually materialize, in spite of liquidity, than you could over time have a correction in the global equities.
What are the economic risks in some of the advanced economies?
Economic growth is fragile in advanced economies. There is a recession in the Euro zone, in the UK(United Kingdom). You still have economic weakness in Japan. And even the United States, the fiscal drag is slowing down growth. And also fiscal policy is constrained because now everybody is doing austerity, in the periphery of the Euro zone, in the core of the Euro zone, in the UK, in the US.
What Is Your Outlook on the US?
Well I do not expect a recession in the United States. What’s happened in the US however, is that the effect of fiscal drag on growth this year is going to be significant. Between raising taxes and cutting spending through the sequester, you have a fiscal drag that is probably close to 1.5% of GDP, and that’s why I expect the US economic growth to be reasonably mediocre and below trend, at 1.6 per cent, maybe 1.7 per cent. I don’t expect a double-dip recession.
What about Japan?
Japan has had last year several quarters of negative growth and recession and ongoing deflation. And what the government is doing right now is through an ambitious effort at monetary and fiscal stimulus, to try to stop deflation to try to jump-start economic growth, to weaken the yen, to boost the stock market and have stronger economic growth and stop the deflation.
Over time, Japan will also have to think about doing fiscal consolidation because their debt is high and eventually unsustainable. It also needs to do structural reforms to liberalise the economy and further trade liberalization like joining the trans-pacific partnership in order to increase potential growth.
How credible do you find the idea of BRICS Bank?
The BRICS have sort of agreed that they want to create a BRICS bank which could provide funding for productive investment both in BRICS and in other emerging markets. I think the details of that bank are still very fuzzy, where that is going to be located who is going to provide most of the capital, which kind of investment, what is the size of it.
This could also be a negative thing, because until now the approach to financial institutions is towards having global financial institutions rather than having regional ones.
What are some of the things that stand in the way of a BRICS Bank?
The BRICS are very diverse with some of them having democratic political systems like in India, Brazil South Africa. There are also differences in that countries like Russia, Brazil and may be South Africa are more resource exporting countries. Other like China enjoys competitive advantages and some of them are more service oriented like India. Some of them are more open to trade and foreign direct investments. So there exists very meaningful political and economical differences within these countries. We will have to see if the BRICS bank is going to really materialize and is successful or not.