Roubini and Bremmer on Why We're Still Doomed
The Dow fell below 10,000 in Tuesday trading following slumps in Europe and Asia but managed to close at 10,044. Leading economic thinkers Nouriel Roubini and Ian Bremmer let readers in on their thoughts on why the economic crisis threatens the free market, who are the likely winners and losers, and why the U.S. might need another debacle before it changes.
At the beginning of this year, we wrote a piece for The Wall Street Journal on the political and economic turmoil moving markets around the world. In it, we argued that “The moment is approaching when the artificial line separating the wealthy from emerging markets will lose much of its relevance.” That day is now much closer.
Both of us have published books this month. Nouriel has written Crisis Economics: A Crash Course in the Future of Finance, a detailed look at booms, busts, and where the global economy is headed. Ian has written The End of the Free Market: Who Wins the War Between States and Corporations? It’s the story of the political factors that now threaten free-market capitalism.
“As long as one side outright refuses to raise taxes and the other is incapable of curbing spending on the public sector, I fear it will take another, possibly even greater crisis to force Americans to unite behind what must be done.”
Given the complementary topics of these books—and the steady stream of recent headlines detailing how economic and political volatility is upending our assumptions about the future—we’ve started a conversation about why all of this is happening and what might happen next.
• Charles R. Morris: Are We Headed for Another Global Crash? Ian Bremmer: I don’t remember a time in the recent past when public analysis of political events has produced so many questions and so few satisfying answers. I think that’s because the world has entered one of those transitional periods that generate widespread uncertainty and fear. The financial crisis and the global recession have hastened the inevitable transition from a U.S.-dominated unipolar international order to a non-polar model, one in which major players like America, Europe, China, Japan, and Russia are so focused on challenges at home that no one has the bandwidth or the backbone to take the lead on a bunch of serious transnational problems.
Taking the big picture first, there are three big problems. First, the world’s advanced industrial economies are all in big trouble right now. In Europe, it’s become pretty clear that the weakest links can throw the entire E.U. project into question. The good news is that a crisis of confidence has forced Greece and Spain to take steps that only a good long look into the abyss could have persuaded them to take. The bad news is that there’s no guarantee that these steps will solve the problem.
In America, the good news is that the fever has broken. The U.S. economy created 231,000 private-sector jobs in April, and the Obama team has pledged that the deficit is about to become job one. The bad news is that as election-year politics push politicians into full-time blame-game mode and the fear of crisis recedes, the pressure to take on tough structural problems may evaporate. A year spent on solving the Rubik’s Cube of health-care reform represents a lost opportunity to have built a solid foundation for the reforms meant to reestablish long-term stability of the U.S. and global economies.
In Japan, the good news… well, there isn’t really any good news in Japan. The bad news is that its current government is dysfunctional and paralyzed at a moment when fiscal problems demand thoughtful and politically courageous solutions.
It’s just not a good time to talk up the virtues of free trade, immigration, and foreign direct investment in any of these countries.
The second problem is that the global meltdown leaves China, an authoritarian country with a state-driven economy, looking like the wave of the future. China’s brand of state capitalism, with its heavy reliance on state-owned companies, state promotion of domestic national champions, sovereign wealth funds, and heavy interference in banking has helped the world’s fastest growing economy bounce back in style. For other important developing countries, stimulus packages in America, Europe, and China leave the clear impression that state-dominated capitalism might just be the wave of the future. That’s very bad news for free markets.
Third, there’s the G-20. Today’s international bargaining table has seats for those who believe in free markets and those who don’t. Building consensus within the G-7 was like herding cats. Getting to yes within the G-20 is like herding cats together with animals that really don’t like cats. It’s a grouping that better reflects today’s true balance of political and economic power. But it’s also a forum that brings together officials with wildly divergent views on the proper role of government in an economy.
Questions deserve answers… wherever answers are possible. Here’s one:
Will the euro soon replace the dollar as the world’s reserve currency?
How’s that for a straight answer?
Nouriel Roubini: How recently the new nabobs of the G-20—primarily China and Russia, of course, but also Malaysia and several other smaller economies—trumped the idea of the euro displacing the dollar. Woe unto the central banker who diversified in that direction too quickly. One of the great ironies of the age, as I mentioned in Crisis Economics, is that fact that while the U.S. proved to be the catalyst for the global financial crisis, it has also benefited from the fact that the crisis is denominated in U.S. dollars. No end to that reality is in sight, no matter how infuriating it proves to Chinese and other emerging-market policymakers.
What we’re seeing now in terms of political volatility, of course, has significant echoes in the financial markets. As we have pointed out repeatedly at RGE, the “bull run” of 2009 and 2010 in equities was funded by the historically loose monetary policies adopted as emergency reflation measures by the Fed and other major central banks. But the steam has been leaking from global market tickers for several weeks now. Volatility, more than any discernable pattern, is the rule.
Yes, the eurozone crisis of PIIGS [Portugal, Ireland, Italy, Greece, and Spain] is a primary cause of that—even Jean-Claude Trichet agrees with my assertion back in February that the E.U. may be facing a double-dip. But more than a few small European economies may be at stake. The recent problems faced by Greece are only the tip of a sovereign-debt iceberg in many advanced economies (and a smaller number of emerging markets). Bond-market vigilantes roiling Spain, Portugal, Ireland, and Iceland have pushed government bond yields higher and forced Germany, France, and the IMF to step in with an unprecedented array of rescue measures. But outside the eurozone, the United Kingdom, and yes, eventually Japan and the United States, will all face the same music eventually if fiscal policy remains on its current unsustainable path.
The fact is, in most advanced economies, aging populations—a serious problem in Europe and Japan—exacerbate the problem of fiscal sustainability, as falling population levels increase the burden of unfunded public-sector liabilities, particularly social-security and health-care systems. Low or negative population growth also implies lower potential economic growth and therefore worse debt-to-GDP dynamics and increasingly grave doubts about the sustainability of public-sector debt.
The United States so far is blessed with a less dire demographic prognosis—largely because of a wise embrace of immigration as a means of rejuvenating the national labor force and its society at large. But that, too, could change, and if it does, the spiraling public debt figures and annual deficits reaching 100 percent of GDP before the end of the decade could create the greatest PIG of all—a creature incapable of living within its means, impossible to control, and increasing detached from the realities (and other large creatures) in the world around it.
No fate is written in stone as of yet. But neither is there any indication that the country is moving toward a political consensus capable of tackling these issues head-on.
As long as one side outright refuses to raise taxes and the other is incapable of curbing spending on the public sector, I fear it will take another, possibly even greater crisis to force Americans to unite behind what must be done.
Nouriel Roubini is the co-founder and chairman of Roubini Global Economics, an innovative economic and geo-strategic information service and consultancy, and a professor of economics at New York University’s Stern School of Business. He is the author of Crisis Economics: A Crash Course in the Future of Finance.
Ian Bremmer is the president of Eurasia Group, the leading global political risk research and consulting firm. He is the author of The End of the Free Market: Who Wins the War Between States and Government?