Friday, October 29, 2010

Roubini: U.S. Heading for Fiscal Train Wreck, QE Will Have Little Effect on Growth

BNN is reporting that Nouriel Roubini says the US is heading for a fiscal train wreck. It appears to be  a reference to a piece he wrote for the FT.

He says that president Obama inherited the worst economic crisis since the Great Depression, as well as a budget deficit that  "after much needed bail-outs and a series of reckless tax cuts – was already close to $1,000bn".

He gives credit to Obama for preventing another depression with his stimulus package, backstop of the financial system, low rates and quantitative easing

However, he says this is but one half of the picture: "we must also judge his first two years on his ability to anticipate what the economy will need tomorrow. Here the picture is much less positive. Given the likely path of fiscal policy after next Tuesday’s election – with the expiration of existing stimulus and transfer payments, and even with most of the 2001-03 tax cuts being kept – the US economy will soon experience serious fiscal drag just when it needs a further boost. Problematically, the administration’s failures leave it relying on the Fed, which is bent on further QE, likely to be announced next Wednesday. But studies show this will have little effect on US growth in 2011, so fiscal policy should be doing some of the lifting to prevent a double dip recession".

[...] "The risk, however, is that something on the fiscal side will snap, and the bond vigilantes will wake up. The trigger could be a debt rollover crisis in a major US state government, [...]. Only then will our politicians suddenly remember that, on top of our federal debt, the US suffers from unfunded social security and Medicare liabilities, state and local government debt, and public pension bills that add up to many multiples of US GDP".

[...] "The result will soon be the worst of all worlds: neither short-term stimulus nor medium-term fiscal sustainability. Fiscally the only light at the end of the tunnel may be that which causes the upcoming crisis. With two years of gridlock in prospect, it will fall to the next president in 2013 – whoever he or she may be – to start fixing America’s fiscal mess. Whether that is Mr Obama or not, that he may leave this challenge may become the worst of his legacy".

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