What's Behind Wall Street's Turmoil
What follows is a continuation of a conversation that Ian Bremmer and Nouriel Roubini began this week about the world economy, the future of free markets, and more. You can read the first installment here.
Bremmer: No question. In fact, many Americans are behaving as if the crisis is past and that we can now afford to move on to the blame game. The Big Short and 13 Bankers are flying off the shelves, Goldman Sachs chief Lloyd Blankfein has faced the ire of an embattled Congress, and endangered incumbents are talking tough.
As you say, the prognosis for the United States is the best in the developed world. You mentioned demographics. I’d add the strength of American educational institutions and strong U.S. spending on research and development. For a country with predictable rule of law, where the independence of governing institutions is often taken for granted, all that matters. If we’ve seen a next “big thing” emerge in the past year, it’s a game changer for global energy—the development of unconventional gas, an innovation dominated by American firms. The market game-changers of the next decade, whatever they turn out to be, are as likely to come from the United States as anywhere else.
“Geopolitical risks are rising, global coordination is lacking—and in the U.S., a nativist lynch mob stalks any politician who dares speak of granting international institutions greater power to monitor impending problems.”
But complacency breeds risk. The Greeks and the Spanish may finally be willing to tighten their belts. Crisis has forced them to act. Are Americans ready for real sacrifice? I don’t see it.
• Randall Lane: What’s Scaring Wall Street? No one in the United States looks ready for the hard long-term conversations that must take place. More than half the country seems not to understand your point about immigration. Openness to new workers will expand the tax base precisely at the moment when it’s most needed. If nativism in the U.S. closes that door, one of America’s primary advantages over Europe and Japan will be squandered.
And where is the Obama administration’s trade agenda? To be fair to the White House, it’s not easy pushing for new trade deals with 17.1 percent real unemployment and a widely accepted (and simplistic) conventional wisdom that globalization has not been kind to America. But to be fair to the country’s future, without a renewed commitment to expanding trade relationships, America’s long-term growth trajectory will be sharply lower than it should be, and Americans will be fighting over slices of a pie that isn’t nearly as big as it could have been.
I also think we should worry that Republican Senate candidate Rand Paul is just the first of many office-seekers (of both parties) who will claim this year that total lack of relevant job experience is essential for intelligent policymaking.
In short, though Western industrialized democracies badly need to get back to basics and play to their strengths, political constraints today make it look particularly unlikely that they will.
On Monday, President Obama delivered a much-anticipated speech on the future of America’s role in the world to 2010 graduates of the U.S. Military Academy. Leadership, multilateral engagement, democracy, building on strengths. All the right words, and it was about time he laid out a global vision. But Washington will be measured not by words but by deeds. If U.S. allies—nevermind its antagonists—are to continue to take seriously American claims to international leadership, Washington will have to demonstrate anew that it is indispensable for global security and prosperity.
That’s going to require a degree of sacrifice and realism that just isn’t there yet.
Nouriel Roubini: One of the things that will become clearer, is that the “recovery” everyone wanted to start trumpeting a few months ago is going to be anemic. It was always going to be so since this is not only a Great Recession, but a Great Recession happening at a time when global geostrategic dynamics are shifting.
RGE’s Outlook for global growth was predictably branded as “too bearish” by many. Yet now consensus is rapidly converging on our position. The EU, and particularly the eurozone members of the EU, is at risk of a double-dip recession. As that unfolds, it could turn out, ironically, that my economists and I were actually too optimistic. EZ (eurozone) woes are fueling risk aversion as investors fear that a liquidity squeeze and possibly a crunch could be around the corner. This would not just affect growth in the EZ but would likely result in a global slowdown consistent with our theme of a year of two halves.
The U.S. won’t be alone, of course. China is hurt by a eurozone double-dip and sharp fall in the euro’s value. (Germany, ironically, will be its main beneficiary since Germany is so export dependent; then again, Germany is going to have to make up for all those taxes that Greeks, Spaniards, Portuguese, and others didn’t pay over the years.)
China, though, already struggles to resolve its own asset bubbles as its stimulus spending and continued expansion in virtually all sectors threatens to overheat. Across the Sea of Japan, Tokyo remains comatose, a situation virtually unchanged since its boom years ended in 1990, and one with no end in sight, especially if there’s a slowdown in the China market so vital to Japanese exports.
This is small solace for the developed world, however. Sovereign debt and annual deficits are rising in advanced economies virtually across the board. About the only exceptions are oddities like Australia, where raw materials exports to China’s manufacturing maw keeps things humming, in Canada, which plays a similar role with its shale oil and other exports for the U.S. market, and small, eccentric cases like oil-rich Norway.
With those small exceptions, the political response in developed nations has been ineffective. Regulatory reforms have been slow in coming and half-hearted in practice. Geopolitical risks are rising, global coordination is lacking—and in the U.S., a nativist lynch mob stalks any politician who dares speak of granting international institutions greater power to monitor impending problems. If this continues, power inevitably will redistribute itself, and we will see more meetings like the U.S.-China Strategic and Economic Dialogue just concluded—where China knew it had really nothing it needed to “win” from the U.S. except a continuation of the status quo. Whatever one thinks about the ethics of Chinese investments in places like Sudan and Myanmar and North Korea, China’s posture at the annual U.S.-China summit makes it clear that, in China’s eyes at least, they see time as being firmly on their side.
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.
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.