History rarely repeats itself, it often rhymes

"At some point the boom became a bubble. Everyone from high-flying banks to ordinary consumer leverage themselves to the hilt, betting on the dubious yet curiously compelling belief that prices could only go up. Most economists blessed this state of affairs, counseling that the market was always right; it was best not to interfere. The handful of dissidents who warned of a coming crash found themselves mocked if not ignored."

A new rabbit?

According to Nouriel Roubini:

"The massive volatility and sharp equity-price correction now hitting global financial markets signal that most advanced economies are on the brink of a double-dip recession. A financial and economic crisis caused by too much private-sector debt and leverage led to a massive re-leveraging of the public sector in order to prevent Great Depression 2.0. But the subsequent recovery has been anemic and sub-par in most advanced economies given painful deleveraging."

[...] "Over time, advanced economies will need to invest in human capital, skills and social safety nets to increase productivity and enable workers to compete, be flexible and thrive in a globalized economy. The alternative is – like in the 1930s - unending stagnation, depression, currency and trade wars, capital controls, financial crisis, sovereign insolvencies, and massive social and political instability."

Data reflect something more serious than a hiccup

Roubini identifies three short-term triggers of a double-dip recession for 2011. Those are:

i) "[…] the problems of the eurozone periphery are in some cases problems of actual insolvency, not illiquidity"

ii) Chronic US growth as a consequence of: "slow but persistent private and public-sector deleveraging; rising oil prices; weak job creation; another downturn in the housing market; severe fiscal problems at the state and local level; and an unsustainable deficit and debt burden at the federal level."

iii) "economic growth has been flat on average in the UK over the last couple of quarters, with front-loaded fiscal austerity coming at a time when rising inflation is preventing the Bank of England from easing monetary policy."

"[The] lack of policy bullets is reflected in most advanced economies' embrace of some form of austerity, in order to avoid a fiscal train wreck down the line. […] If the latest global economic data reflect something more serious than a hiccup, and markets and economies continue to slow, policymakers could well find themselves empty-handed. If that happens, the risk of stall speed or an outright double-dip recession would rise sharply in many advanced economies."

Source: Project Syndicate

A source of oil-price spikes

According to Roubini:

Severe unrest in the Middle East has historically been a source of oil-price spikes, which in turn have triggered three of the last five global recessions. The Yom Kippur War in 1973 caused a sharp increase in oil prices, leading to the global stagflation of 1974-1975. The Iranian revolution in 1979 led to a similar stagflationary increase in oil prices, which culminated in the recession of 1980-1981. And Iraq’s invasion of Kuwait in August 1990 led to a spike in oil prices at a time when a US banking crisis was already tipping America into recession.

The latest increases in oil prices – and the related increases in other commodity prices, especially food – imply several unfortunate consequences (even leaving aside the risk of severe civil unrest).

[...] inflationary pressure will grow on already-overheating emerging market

[...] rising oil prices reduce investor confidence and increase risk aversion 

[...] If oil prices rise much further – towards the peaks of 2008 – the advanced economies will slow sharply; many might even slip back into recession. And, even if prices remain at current levels for most of the year, global growth will slow and inflation will rise. 

Source: Project-Syndicate

"Greed is good"

Gordon Gekko Reborn by Nouriel Roubini

"[G]reed cannot be controlled by any appeal to morality and values. Greed has to be controlled by fear of loss, which derives from knowledge that the reckless institutions and agents will not be bailed out."

Double Dip? Seven Reasons Why Not

Milton Ezrati offers seven reasons why the Double-Dip scenario is unlikely.

1. The Consumer Seems Firm Enough
2. Housing Data Are Misleading on Two Sides
3. Business Spending and Exports Are Awfully Strong for a Dip
4. Overall Production Levels Look Fairly Good, Too
5. Employment Does Not Look Threatening, Either
6. Financial Markets Are Healthier Than the Headlines Imply
7. China Continues to Grow

Nouriel Roubini recommended: "Fasten your seat belts for the very bumpy ride"

"as the optimists' delusional hopes for a rapid V-shaped recovery evaporate, the advanced world will be at best in a long U-shaped recovery, which in some cases – the eurozone and Japan – may be long enough to stretch into an L-shaped near-depression. Avoiding double dip recession will be difficult."

"[R]ecovery in emerging markets - the great hope for the global economy - will suffer, because no country is an island economically. Indeed, growth in many emerging-markets - starting with China - is highly dependent on retrenching advanced economies."

How to Avoid a Double-Dip Global Recession

So what should policymakers do? by Nouriel

Now comes the rescue of the rescuers

Our global debt mechanics are looking increasingly like a Ponzi scheme

"Crises are the inevitable result of a build-up of macroeconomic, financial, and policy risks and vulnerabilities: assets bubbles, excessive risk-taking and leverage, credit booms, loose money, lack of proper supervision and regulation of the financial system, greed, and risky investments by banks and other financial institutions."

"[Additionally] a practical definition of a financial crisis is an event that forces policy officials to spend a long weekend trying desperately to announce a new bailout package in order to avoid national and global panic before the markets open on Monday. In the past years, such weekend all-nighters dealt with the needed bailouts of private firms – Bear Stearns, Fannie Mae and Freddie Mac, Lehman Brothers, AIG, bank rescues, etc."

According to Eichengreen:

The last few weeks have been the most amazing – and important – period of the euro’s 11-year existence. First came the Greek crisis, followed by the Greek bailout. When the crisis spread to Portugal and Spain, there was the $1 trillion rescue. Finally, there were unprecedented purchases of Spanish, Portuguese, Greek, and Irish bonds by the European Central Bank. All of this was unimaginable a month ago.

Inflation or Default

"There are only two solutions to the sovereign debt crisis — raise taxes or cut spending — but the political gridlock may prevent either from happening"

States of Risk

According to Nouriel Roubini:

The Great Recession of 2008-2009 was triggered by excessive debt accumulation and leverage on the part of households, financial institutions, and even the corporate sector in many advanced economies. While there is much talk about de-leveraging as the crisis wanes, the reality is that private-sector debt ratios have stabilized at very high levels.

By contrast, as a consequence of fiscal stimulus and socialization of part of the private sector's losses, there is now a massive re-leveraging of the public sector. Deficits in excess of 10% of GDP can be found in many advanced economies, and debt-to-GDP ratios are expected to rise sharply – in some cases doubling in the next few years.

As Carmen Reinhart and Ken Rogoff's new book This Time is Different demonstrates, such balance-sheet crises have historically led to economic recoveries that are slow, anemic, and below-trend for many years. Sovereign-debt problems are another strong possibility, given the massive re-leveraging of the public sector.

¡It was't ready!

In this post I quoted Krugman, Eichengreen and Roubini in order to have a Euro-zone’s Big Picture.

Krugman said that the troubles came from the adoption of the euro before Spain and Greece were ready:

Now what? A breakup of the euro is very nearly unthinkable... As Berkeley's Barry Eichengreen puts it, an attempt to reintroduce a national currency would trigger "the mother of all financial crises". So the only way out is forward: to make the euro work, Europe needs to move much further toward political union, so that European nations start to function more like American states.

But that's not going to happen anytime soon. What we’ll probably see over the next few years is a painful process of muddling through: bailouts accompanied by demands for savage austerity, all against a background of very high unemployment, perpetuated by the grinding deflation I already mentioned.

It’s an ugly picture. But it’s important to understand the nature of Europe's fatal flaw. Yes, some governments were irresponsible; but the fundamental problem was hubris, the arrogant belief that Europe could make a single currency work despite strong reasons to believe that it wasn’t ready.

Eichengreen emphasized the failure to create a "proper emergency financing mechanism"

[…] reating the euro was not a mistake, but it could still be a mistake in the making. The Greek crisis shows that Europe is still only halfway toward creating a viable monetary union. If it stays put, the next crisis will make this one look like a walk in the park.

Completing its monetary union requires Europe to create a proper emergency financing mechanism. Currently, other member states can provide assistance to Greece only by bending the rules, which prevent them from lending except in response to natural disasters or circumstances beyond a country's control. This heightens uncertainty. When Europe’s leaders do help, it makes the public and markets think that they are being dishonest. If it is the Lisbon Treaty that creates these problems, then the Lisbon Treaty should be changed.

Roubini requested a "partial bailout by the EU and the ECB […] in order to avoid the risk of contagion to the rest of the euro zone"

A shadow or actual International Monetary Fund program would vastly enhance the credibility of a policy of fiscal retrenchment and structural reforms. Under the former, the European Commission would impose fiscal and structural conditionality on Greece, while the EU and/or ECB would provide financing, which would be absolutely necessary, because announcing even the best conceived reform program would not be sufficient to restore lost policy credibility. Markets will remain skeptical, especially if implementation leads to street demonstrations, riots, strikes, and parliamentary foot-dragging. Until credibility is re-established, the risk of a speculative attack on public debt – reflected in the current rise in credit default swap spreads – would linger, given the ongoing budget deficit and the need to roll over maturing debt.

Since the European Union has no history of imposing conditionality, and ECB financing could be perceived as a form of bailout, a formal IMF program would be the better approach. The most successful programs undertaken in the presence of a risk of a fiscal and/or external debt financing crisis were those – as in Mexico, Turkey, and Brazil – where a large amount of liquidity/financing support by the IMF beefed up an increasingly credible commitment to adjustment and reform.

Sovereign spreads are already pricing the risk of a domino effect from Greece to Spain, Portugal, and other euro-zone members. The EU and the ECB are worried about the moral hazard of any "bailout". But that is precisely why a credible IMF program that ties financial support to the progressive achievement of fiscal and structural reform goals is the right way to teach Greece and the other PIIGS how to fly.

A Gold Bubble?

Nouriel Roubini commented:

"Gold prices rise sharply only in two situations: when inflation is high and rising, gold becomes a hedge against inflation; and when there is a risk of a near depression and investors fear for the security of their bank deposits, gold becomes a safe haven."

"The last two years fit this pattern. Gold prices started to rise sharply in the first half of 2008, when emerging markets were overheating, commodity prices were rising, and there was concern about rising inflation in high-growth emerging markets. Even that rise was partly a bubble, which collapsed in the second half of 2008, when – after oil reached $145, killing global growth –the world economy fell into recession. As concerns about deflation replaced fear of inflation, gold prices started to fall with the correction in commodity prices."

"[...]Eventually, central banks will need to exit quantitative easing and zero-interest rates, putting downward pressure on risky assets, including commodities. Or the global recovery may turn out to be fragile and anemic, leading to a rise in bearish sentiment on commodities – and in bullishness about the US dollar."

"Another downside risk is that the dollar-funded carry trade may unravel, crashing the global asset bubble that it, together with the wave of monetary liquidity, has caused. And, since the carry trade and the wave of liquidity are causing a global asset bubble, some of gold’s recent rise is also bubble-driven, with herding behavior and “momentum trading” by investors pushing gold higher and higher. But all bubbles eventually burst. The bigger the bubble, the greater the collapse."

Thik the worst is over? Wrong - US Unemployment

Accordingly with Nouriel Roubini:

"[The jobs just are not coming back] There's really just one hope for our leaders to turn things around: a bold prescription that increases the fiscal stimulus with another round of labor-intensive, shovel-ready infrastructure projects, helps fiscally strapped state and local governments and provides a temporary tax credit to the private sector to hire more workers. Helping the unemployed just by extending unemployment benefits is necessary not sufficient; it leads to persistent unemployment rather than job creation."

"[...] it is most likely that the unemployment rate will peak close to 11% and will remain at a very high level for two years or more."

Doom & LAM (Capital Controls & Outlook)

Un par de artículos sobre LAM por Dr. Doom

Capital Controls

"The danger, of course, is that even when controls are removed, capital inflows will not return. However, as economist Willem Buiter noted in February: 'The example of Malaysia, which imposed capital controls during the Asian crisis of 1997 suggests that foreign capital either has a short memory or can be convinced'."

Latin America Outlook

"Though global liquidity will remain elevated in the upcoming quarters, favoring Latin American asset classes, market anxiety about the timing of exit strategies around the world represents a significant risk. Miscalculations in exit strategies and disappointing economic results pose the main risks to Latin American market dynamics in 2010."
Source: Forbes.com

Risky asset prices have risen too much, too soon

De acuerdo con Nouriel Roubini:

"Since March there has been a massive rally in all sorts of risky assets – equities, oil, energy and commodity prices – a narrowing of high-yield and high-grade credit spreads, and an even bigger rally in emerging market asset classes (their stocks, bonds and currencies). At the same time, the dollar has weakened sharply, while government bond yields have gently increased but stayed low and stable."

"Easy money, quantitative easing, credit easing and massive inflows of capital into the US via an accumulation of forex reserves by foreign central banks makes US fiscal deficits easier to fund and feeds the US equity and credit bubble."

Agrega:

"But one day this bubble will burst, leading to the biggest co-ordinated asset bust ever: if factors lead the dollar to reverse and suddenly appreciate – as was seen in previous reversals, such as the yen-funded carry trade – the leveraged carry trade will have to be suddenly closed as investors cover their dollar shorts. A stampede will occur as closing long leveraged risky asset positions across all asset classes funded by dollar shorts triggers a co-ordinated collapse of all those risky assets – equities, commodities, emerging market asset classes and credit instruments."

Source: FT.com