Tuesday, March 3, 2009

Roubini: From "V" to "U" to "L"

Nouriel Roubini is not called "Dr Doom" for nothing. He is now warning of a precipitous drop in the global economy, all things being equal, of course. He wrote this op-ed piece:

LAST year, the debate over how long the recession will last was between those in the consensus who argued that it would be V-shaped — only about eight months long like those in 1990 to 1991 and in 2001 — and those like me who argued that it would last at least three times as long, 24 months, and be more than three times as deep as the previous two.

Today, as we enter the 15th month, it’s obvious that we are already in a painful U-shaped recession that has become global and will last at least until the end of the year — 24 months, the longest since the Great Depression. Even if the gross domestic product grows in 2010, it is likely to be no higher than 1 percent. And at that rate, with the unemployment rate rising toward 10 percent, we will still be substantially in a recession.

Even if appropriate aggressive policy actions were undertaken — monetary and fiscal stimulus, bank clean-up and credit restoration, mortgage debt reduction for insolvent households — the growth rate would not rise closer to 2 percent until 2011. So this recession may last 36 months.

And things could get worse. We now face a 1 in 3 chance that, if appropriate policies are not put in place, this ugly U-shaped recession may turn into a more virulent L-shaped near-depression or stag-deflation (a deadly combination of economic stagnation and price deflation) like the one Japan experienced in the 1990s after its real estate and equity bubbles burst.


walla said...



de minimis said...

bro Walla

Many thanks. Very useful reference. Looks even more lame than I thought. The policy responses enumerated looks pretty superficial.

walla said...

Some of these comments are also in response to preceding posts...


Maybe someone can assay what are the quantitative ratios that will kick in as the multipliers because that's what seems to be the underpinning assumption for this local fiscal stimulus package.

...examples elsewhere include:


Design Process

Secondly, some of the proposals in the package were already announced beforehand so it looks like the process to design the package wasn't done from one starting point which means there was no full picture from the very beginning. In sum, something seems to be missing in the overall approach. It appears patchy... redolent of the national automotive policy, for example.


Thirdly, it's mostly construction, a bit on training, and some miscellany.

Both construction and training take time to deliver results and the results are contingent upon other industries being primed synchronously.

There's a glut in the urban areas so construction there may give work to the foreign workers but how will it help give money to the urban dweller who's already sunk by mortgages, debts and no urban jobs?

And if you have construction in the rural areas, that may give something to the rural workers but rural buildings cannot be expected to be as sophisticated to require material and service inputs at the same value level as one would apply for urban areas so (a) how much can what is earned in the rural area spread down to the pyramid base, and (b) how much will the urban employer or worker benefit, if at all?

Location-based Effects

In other words, there could be a multiplier differential in which the urban industry may be expected to spin greater and faster leverage on a bigger population than the rural industry.

Which begs the question whether we know the sizes of the bangs-for-the-bucks and where these bangs will deliver maximum benefits?

Which asks, 'are there two sets of schedular multipliers for whatever fiscal stimulus is being considered?'


In similar vein, training. Look at the list and the first question will be 'where's the big plan for human capital of this country, looking forward?' Or, 'can we envision what will be the skill sets our people must have when the next recovery cycle kicks in that will provide a filip for our national strategic thrusts to have a better start because to thrive in a globalized-market means one must already have global-relevant skill sets?

One seemingly inserted suggestion unearths two questions - 'what exactly do you want unemployed bankers to do in this country, and how do you see them optimized to contribute even more after five years from now?', in which case 'what about unemployed engineers, sales people, property brokers, insurance agents, retail shop assistants, lorry and bus drivers?'

If the actual answer is that the stimulus is to provide some allowance for retrenched professionals, for instance, to coast by, then there should be a list to include every category of employment which will be affected by the downturn which in turn will call for sizes of household expenditure squared against present income of the main breadwinner matched against skill-sets deployed and ranked in some order of relative earnings affected. Probably one can start a web questionnaire and get people to start filling online for last or next month's commitments, plus the other details on employment. And so on. Just go on tv, radio and the press and say it's a crisis so please fill the form once and accurately.

The Missing Pieces

One, hopefully a study would already have been done on the efficiency of grants. A lot of money is tied down there which cannot be disbursed because of some strange conditions, or because the marketing is not well executed, or because there's some hanky-panky, or because it has achieved a poor record of performance because the previous money had gone to the wrong guys in the wrong place at the wrong time for the wrong purpose.

All should be reviewed to free or cross-over funds for better and faster deployment because the dyke is bursting.

Two, another missing piece is probably encapsulated in whatever answers you may want to supply for these questions:

- where are the real revenue and employment generators for the economy of this country? and

- what have you really not been doing for the SMEs which are local enterprises that employ a lot of people but have to suffer from the bleeding conditions and hurdles set by funds providers?

Isn't it terrible, for instance, if people have to take loans on ruinous terms from underground sources just so they can pay wages to their workers, and suffering unimaginable misery thereafter on top of their lifelong investments going down the drain with no prospect of averting a fire-sale of still-productive assets?

Three, how current are the real data inputed for computing the package? If audit reports are late by two years, state offices don't submit annually because they don't have the appropriate staff, and you can't even find what's the landed value of things like systems and application software, ever so dependent on forwarding agents filling the import forms, then there'll be big gaps everywhere in the design process.

Four, how to promote local products and local services in such a way as to lock in commitment as well on the imperative of constant improvement and value-for-money? Hopefully the next package will address this critical (and multiple) question.

Five, what to do with the big bleeders? They will always say that it's not their inefficiencies but it's the external global factor. Can the next package present a fait accompli that if they don't buck up, market forces will operate exclusively in which case if demand builds, industries will be reconfigured, enterprises will be restructured, processes will be reengineered and procedures and standards will be revamped?