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Roubini warns of fiscal train wreck

with one comment

Economist Nouriel Roubini, writing in Financial Times, warns that the election of so many GOP’ers will cause an even deeper recession on the order of the 10 year Japanese stagnation. He writes that what Obama did was correct, although the stimulus should have been larger and another one is need right now. However, the GOP/TEA party will never allow it or any of the tax increases required to bring down the deficit. As a result of the coming gridlock, he expects the bond holders to wake up one day soon after the election and start demanding their money. That will spell doom to the economy and may result in a worse recession.

The upshot is that the current gridlock in Congress will soon get much worse. Of course, Mr Obama cannot entirely be blamed for his limited progress, when the Republicans take that Leninist approach of “the worse the better”, and offer no co-operation on any issue. That they now see Mr Obama as a one-term president will soon mean the worst open warfare inside the Beltway in 30 years.

The coming stalemate will only be made worse by the lack of a reason to act on the deficit. The bond vigilantes are asleep, while borrowing rates remain unusually low. Near zero rates will continue as long as growth and inflation are low (and getting lower) and repeated bouts of global risk aversion – as with this spring’s Greek crisis – will push more investors to safe dollars and US debt. China’s massive interventions to stop renminbi appreciation will mean purchasing yet more treasuries too. In short, kicking the can down the road will be the political path of least resistance.

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, or perhaps even the realisation that congressional gridlock means bipartisan solutions to our medium-term fiscal crisis is mission impossible. 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.

Scared? You should be.

It really angers me that the GOP played politics and that the TEA party GOP’ers lack so much economics knowledge. They’re leading the country to certain fiscal stagnation or worse. If the Tea party/GOP win this election, we will all live to regret it. Already, some TEA party GOP’ers are taking about defaulting on the debt. “It would be a shame, but it might be necessary.” If that happens, the current recession will look like a stroll in the park on a sunny morning. It will make the Great Depression look like a serious Recession. It will ruin the country.

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Written by Valerie Curl

October 29, 2010 at 8:02 PM

One Response

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  1. makes me want to drink alchoholic beverages

    david

    December 1, 2010 at 1:45 AM


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