To Avoid a Double Dip, Ignore Nouriel Roubini
Economist of the moment Nouriel Roubini continues to profit from the attention that has resulted from his alleged prediction of the 2008 financial crisis. The problem for Roubini is that if looked at objectively, the '08 crisis wasn't financial, and his prediction simple luck.
It was luck given the basic truth that no one, including Roubini, could have predicted the global government response that truly authored the crack-up. Contrary to his view that the moderation of housing was the crisis, the greater, historically accurate reality is that the global rush to housing driven by weakening currencies around the world was the recession. And when the markets started to correct classical Austrian malinvestment whereby limited capital flowed into the proverbial ground, the global economy began to heal; its rebound thwarted by government intervention.
But the crisis itself was the intervention. Far from financial, it was a government creation (something Roubini never forecasted) thanks to gargantuan mistakes being bailed out which disallowed the natural cleansing of the financial system. Short sellers were subsequently abolished, thus removing downside protection from the markets, and then worst of all, investors had to price in a future of muscular government involvement in the global economy despite the obvious fruits wrought by economic liberalization over the previous thirty years.
Roubini predicted none of this. Instead, he remarkably called for a stimulus package triple the size of the one President Obama foisted on the economy, and then later on told the Wall Street Journal that U.S. banks should be nationalized. Not only was Roubini's ill-gotten reputation made by the very government intrusion that he advocated, his post-crisis musings, if implemented, would have made a bad problem much worse.
Apparently unwilling to go gently into the night, Roubini continues to dine out on status that's been falsely elevated by something he didn't predict. Just last week he penned a widely read essay on how the global economy can avoid a double dip. Here's hoping he's ignored, unless of course we want further economic hardship.
Roubini's general contention is that if governments "take away the monetary and fiscal stimulus too soon - when private demand remains shaky - there is a risk of falling back into recession and deflation." Rarely has a mere portion of a sentence been so pregnant with falsehoods and misunderstandings.
First off, there's no such thing as fiscal stimulus of the spending kind. Though it's well known at this point, governments can only spend money they've first taken from the private sector. In short, governments can at best merely steal demand from certain economic sectors in order to fund generalized waste and a bigger state. There's no economic growth to speak of here.
Secondly, it bears mentioning once again that no act of saving ever detracts from demand. Roubini's suggestion that governments must spend when individuals don't defies basic economics. Indeed, short of stuffing dollars/pounds/euros/yen/yuan under mattresses, when individuals save, their funds are either shifted to others with immediate consumptive needs, or lent to businesses eager to grow.
Considering loans to businesses that result from reduced consumption, everything we have today is the result of past saving. Entrepreneurs can't innovate without free capital, and as such, we have Apple, FedEx and Wal-Mart today thanks to the past willingness among individuals to forego consumption in favor of saving. If Roubini's logic is applied here, governments would confiscate limited capital in order to fund government growth.
The above would naturally have a chilling effect on the global economy. If we ignore that governments lacking resources can only spend what they've first taken from the private sector, increased government spending would lead to excessive government hiring that would make it more expensive for private sector firms to hire presently unemployed workers thanks to governments driving up the cost of labor.
Worse, the global economy would suffer a second body blow for limited human capital being captured by government over the private sector. Looking at the U.S. alone, would we rather free capital remain in the real economy in order to fund tomorrow's Ciscos, Intels and Microsofts, or would we prefer it spent by governments eager to add staff at the Post Office, SEC and Department of Agriculture? Which is more stimulative?
The notion of deflation merited numerous mentions in Roubini's polemic, and the irony there is that he mis-defines it. To put it simply, deflation results from currencies rising substantially in value. Given the broad-based decline among currencies of all shapes and sizes in concert with a broad commodity rally over the last ten years, there's no deflation to speak of.
In truth, what Roubini thinks to be deflation is in fact a decline in the availability of credit. The irony here is that his prescription of "lower policy rates" to a high degree explains the lack of credit.
Much as government price controls in the areas of rent and oil (think the gasoline "shortages" in the ‘70s) have historically led to reduced availability of both, so do government attempts to make credit artificially cheap make it hard to find. To state the obvious, the desire among central banks to make credit cheap through low rates is driving down the nominal cost of credit, and lenders to the sidelines. Why offer credit when governments are reducing compensation for doing so?
Concerning money itself, Roubini advocates money creation as though lots of "money" is an economic stimulant. If his thinking were accurate, counterfeiting would be legal.
In truth, however, money's sole purpose is to facilitate the exchange of goods. Money is not wealth. In that sense, perfect money is that which doesn't change in value. And if investors sell down currencies thanks to central banks overprinting as Roubini advocates through "more quantitative easing", increased inflation will be the result such that job-creating investment and credit will become even more scarce.
And in an economic piece full of discredited ideas, Roubini naturally expresses concern over countries practicing export strategies; as in selling goods while not buying them. It's a nice thought, albeit a mythical one in that there's no such thing as an export strategy.
In the real world, most of us know that production itself is consumption, demand occurring after production. We work so that we can consume. As for the individuals who choose to delay consumption (Roubini fingers workers in China and Germany for instance), their production is demand like any other. Indeed, if they save, they're merely shifting their consumptive ability to others. Export strategies are popular in the academic, conference-attending circles that Roubini seems to run in, but they're as real as the Loch Ness monster.
Every bull and bear market has its heroic figures, sometimes with good reason. In Roubini's case, his lofty reputation is largely due to a prediction made true mostly thanks to the very economy-retarding policies that he continues to promote in order to remain relevant. History will prove Roubini to be a one-hit wonder, and that's me being charitable.
Judging by his economy-harming ideas, Roubini's Warholian 15 minutes of fame are about to expire. For those who've drank the Roubini Kool-Aid, it's probably a good idea now to jump off this train. To understand why, Google the name "Elaine Garzarelli" and find out how many correct predictions she made after the '87 crash. Just a suggestion.