Nouriel Roubini, the US economics professor who is chairman of Roubini Global Economics and famous for predicting the ongoing global financial crisis, believes the current regime of low interest rates could result in money going to asset price inflation, rather than doing good in the real economy. An extended period of such easy credit could eventually lead to an asset bubble, with an unhappy ending, he said in a media interaction on the sidelines of the plenary session of the 44th General Assembly of the World Trade Centers Association (WTCA), in Mumbai. Excerpts:
Can you predict when the next bubble will burst?
It is hard to predict bubbles and bursts. But I would say that on the one side, economic growth is weak in the advanced economies, unemployment rate is high, thus justifying more quantitative easing and keeping interest rates at zero for longer. Everything from quantitative easing to zero policy rates is tried to support incomes, jobs and productions.
On the other hand, a lot of this liquidity is not creating credit for the real economy; it is going into asset price inflation and adding to the leveraging in the financial system.
The normalisation of these policy rates at zero could imply that one or two or three years from now, this could prove a bubble - we have already seen the effect of this on asset markets. Eventually, that boom and bubble could, down the line, lead to a burst or a crash.
Money is moving out of gold and entering into equity. Comment.
It is not clear. The reason why global commodity prices are falling now is because of the global growth scare, due to weakness in the Euro zone, the UK, in Japan and slowing growth in the US. There is also a growth scare coming, the fact that China has now shown signs of slowing. And, other BRICS are adding a weak economic growth.
So, if the growth scare is more than a scare, that's going to have a negative impact on earnings and profitability and, thus, a negative outlook for the US and global equities.
On the other side, however, if there is growth weakness leading to new rounds of monetary and quantitative easing by global central banks, keeping other things equal, the liquidity searching for higher yield might enter into the US and other global equity markets.
Higher liquidity will cause asset price inflation. But if liquidity spreads because of the downside risk to global economic growth and if the downside risk to growth actually materialises, in spite of liquidity, then you could, over time, have a correction in global equities.
What are the economic risks in some of the advanced economies?
Economic growth is fragile in advanced economies. There is a recession in the Euro zone, in the UK. You still have economic weakness in Japan. And, even in the US, the fiscal drag is pulling down growth. Also, fiscal policy is constrained because everybody is now doing austerity, in the periphery of the Euro zone, in the core of the Euro zone, in the UK, in the US.
Your outlook on the US.
Well, I do not expect a recession. What's happened in the US is that the effect of fiscal drag on growth this year is going to be significant. Between raising taxes and cutting spending through the sequester, you have a fiscal drag that is probably close to 1.5 per cent of GDP, and that's why I expect the US economic growth to be reasonably mediocre and below trend, at 1.6 per cent, maybe 1.7 per cent. I don't expect a double-dip recession.
What about Japan?
Last year, Japan had several quarters of negative growth and recession and ongoing deflation. What the government is doing now is through an ambitious effort at monetary and fiscal stimulus, to try to stop deflation, to try to jump-start economic growth, to weaken the yen, to boost the stock market and have stronger economic growth and stop the deflation.
Over time, Japan will also have to think about doing fiscal consolidation because their debt is high and eventually unsustainable. It also needs to do structural reforms to liberalise the economy and further trade liberalisation like joining the trans-Pacific partnership to increase potential growth.
How credible do you find the idea of a BRICS bank?
The BRICS have sort of agreed that they want to create a BRICS bank which could provide funding for productive investment, in both BRICS and other emerging markets. The details are still very fuzzy - location, who is going to provide most of the capital, which kind of investment, size. This could also be a negative thing. Till now, the approach to financial institutions is towards having global financial institutions, rather than regional ones.
What are some of the things in the way of a BRICS bank?
The BRICS are very diverse. Some of them have democratic political systems like in India, Brazil and South Africa. There are also differences in that countries like Russia, Brazil and maybe South Africa are more resource exporting countries. Others like China enjoy competitive advantages and some of them are more service-oriented, like India.
Some of them are more open to trade and foreign direct investment. So, there exists very meaningful political and economical differences within these countries. We will have to see if the BRICS bank is going to really materialise and is successful or not.