Is Capitalism Doomed?

- Nouriel Roubini - Project Syndicate

http://www.project-syndicate.org/commentary/roubini41/English

AFTER THE STORM

Is Capitalism Doomed?
Nouriel Roubini
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2011-08-15

Is Capitalism Doomed? NEW YORK 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. Now a combination of high oil and commodity prices, turmoil in the Middle East, Japans earthquake and tsunami, eurozone debt crises, and Americas fiscal problems (and now its rating downgrade) have led to a massive increase in risk aversion. Economically, the United States, the eurozone, the United Kingdom, and Japan are all idling. Even fast-growing emerging markets (China, emerging Asia, and Latin America), and export-oriented economies that rely on these markets (Germany and resource-rich Australia), are experiencing sharp slowdowns. Until last year, policymakers could always produce a new rabbit from their hat to reflate asset prices and trigger economic recovery. Fiscal stimulus, near-zero interest rates, two rounds of quantitative easing, ring-fencing of bad debt, and trillions of dollars in bailouts and liquidity provision for banks and financial institutions: officials tried them all. Now they have run out of rabbits. Fiscal policy currently is a drag on economic growth in both the eurozone and the UK. Even in the US, state and local governments, and now the federal government, are cutting expenditure and reducing transfer payments. Soon enough, they will be raising taxes. Another round of bank bailouts is politically unacceptable and economically unfeasible: most governments, especially in Europe, are so distressed that bailouts are unaffordable; indeed, their sovereign risk is actually fueling concern about the health of Europes banks, which hold most of the increasingly shaky government paper. Nor could monetary policy help very much. Quantitative easing is constrained by above-target inflation in the eurozone and UK. The US Federal Reserve will likely start a third round of quantitative easing (QE3), but it will be too little too late. Last years $600 billion QE2 and $1 trillion in tax cuts and transfers delivered growth of barely 3% for one quarter. Then growth slumped to below 1% in the first half of 2011. QE3 will be much smaller, and will do much less to reflate asset prices and restore growth. Currency depreciation is not a feasible option for all advanced economies: they all need a weaker currency and better trade balance to restore growth, but they all cannot have it at the same time. So relying on exchange rates to influence trade balances is a zero-sum game. Currency wars are thus on the horizon, with Japan and Switzerland engaging in early battles to weaken their exchange rates. Others will soon follow. Meanwhile, in the eurozone, Italy and Spain are now at risk of losing market access, with financial pressures now mounting on France, too. But Italy and Spain are both too big to fail and too big to be bailed out. For now, the European Central Bank will purchase some of their bonds as a bridge to the eurozones new European Financial Stabilization Facility. But, if Italy and/or Spain lose market access, the EFSFs 440 billion ($627 billion) war chest could be depleted by the end of this year or early 2012. Then, unless the EFSF pot were tripled a move that Germany would resist the only option left would become an orderly but coercive restructuring of Italian and Spanish debt, as has happened in Greece. Coercive restructuring of insolvent banks unsecured debt would be next. So, although the process of deleveraging has barely started, debt reductions will become necessary if countries cannot grow or save or inflate themselves out of their debt problems. So Karl Marx, it seems, was partly right in arguing that globalization, financial intermediation run amok, and redistribution of income and wealth from labor to capital could lead capitalism to self-destruct (though his view that socialism would be better has proven wrong). Firms are cutting jobs because there is not enough final demand. But cutting jobs reduces labor income, increases inequality and reduces final demand. Recent popular demonstrations, from the Middle East to Israel to the UK, and rising popular anger in China and soon enough in other advanced economies and emerging markets are all driven by the same issues and tensions: growing inequality, poverty, unemployment, and hopelessness. Even the worlds middle classes are feeling the squeeze of falling incomes and opportunities. To enable market-oriented economies to operate as they should and can, we need to return to the right balance between markets and provision of public goods. That means moving away from both the Anglo-Saxon model of laissez-faire and voodoo economics and the continental European model of deficit-driven welfare states. Both are broken. The right balance today requires creating jobs partly through additional fiscal stimulus aimed at productive infrastructure investment. It also requires more progressive taxation; more short-term fiscal stimulus with medium- and long-term fiscal discipline; lender-of-last-resort support by monetary authorities to prevent ruinous runs on banks; reduction of the debt burden for insolvent households and other distressed economic agents; and stricter supervision and regulation of a financial system run amok; breaking up too-big-to-fail banks and oligopolistic trusts. 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. Nouriel Roubini is Chairman of Roubini Global Economics, Professor of Economics at the Stern School of Business, New York University, and co-author of the book Crisis Economics. Copyright: Project Syndicate, 2011. www.project-syndicate.org

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Is Capitalism Doomed? - Nouriel Roubini - Project Syndicate

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RangerHondo 04:24 15 Aug 11 Same old Keynesian shrill....we have to spend more money we don't have on more unproductive investments we don't need....which will again deplete what wealth we have left.....The Caviliers of Finance never change

Econostar 05:37 15 Aug 11 Our economist overlooks the fact that demand still exists even in the absence of financial means. As any immigrant from a socialist country will tell you, America is the land of opportunity. If someone won't give you a job, then you make your own opportunities.

Mrquetiapine 08:08 15 Aug 11 http://www.youtube.com/watch?v=jbkSRLYSoj Life has never been so good on this planet for the masses wrt health and wealth. The US overbuilt and soon enough, the demand will meet the supply. Capitalism means recessions, it's the price of admission. All in all there is no known better way we can get everybody contributing to the problem of hunger shelter snd clothing.

veronica1979 09:10 15 Aug 11 Mr. Roubini is correct in his diagnosis. It is clear that the world's financial system is crumbling. It is not just one country that is feeling this. Rather, the crisis is felt worldwide. Our economy is showing us to what extent we are connected. We see how what happens in Spain and Italy impact all of Europe and how the collapse of the financial system leads to social and political unrest. It seems the world is in complete chaos and no one knows how and where to act. Could more jobs or more financial stimulus really be the answer? It seems to be that the real problem is the foundation on which the entire economic system was built. Rather than looking out for the well-being of society, this system was built to benefit a small minority. Perhaps it is time to start looking at the economy as a means for providing life essentials to all. Maybe if we structure and begin using the financial system in this direction, we will see how things will begin to normalize and stabilize.

stepan1 09:37 15 Aug 11 Crony capitalism and Socialism are NOT capitalism. Both of the former are doomed to fail whenever they are tried. Capitalism is not only the free flow of goods and services, but the free flow of INFORMATION: the price signals that supply and demand convey. When you choke off the free flow of information, the economic system is bound to fail. Where is the mystery in that? Marx was not only wrong, but he was a complete leech on society, borrowing the money from Engels to burry his own daughter. Do we need to follow or listen to role models like that? I think not. You can safely trash Marx, his progressive followers, and Nouriel Roubini's advice. They and it are the problem, not the solution.

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Is Capitalism Doomed? - Nouriel Roubini - Project Syndicate

http://www.project-syndicate.org/commentary/roubini41/English

sco 10:45 15 Aug 11 I agree the globalization is a cause of the present economic problems. On the other hand, I think they would not be solved just by increasing the productivity, because there is not just a competition between two similar economy types, but between two different political systems. There is a battle between China and the rest of the world. Many years of tradition, education, and discipline are involved here, which would be a true handicap for a free system to compete. I think the battle is so unbalanced that just restrictive rules would protect the capital to go out the border, and would restore the prosperity, and the economy health.

philgrimm 10:51 15 Aug 11 I disagree with the insightful Mr. Roubini. The way to future prosperity is to limit governmental regulation, make everyone a stakeholder by creating a universal flat-rate tax code, eliminate the mortgage tax exemption and force the government out of the home mortgage business. Force government to liquify its natural resources holdings and all land currently controlled by the BLM. Force the government out of the education business. The list goes on... It's not Marxism per se, it's centralized Authoriatrian--too big to fail-- government that is the problem.

Econostar 11:11 15 Aug 11 Finally, we are getting somewhere. philgrimm has an excellent point about government debt and the divestiture of public assets. i.e. consumers should pay for services such as roads, hospitals, education etc. I would only disagree to the extent the miilitary is involved as protection of the state cannot be left to opinion polls, debate and pay per use. Such action would result in eventual demise of the state.

KeithEKennedy 12:54 16 Aug 11 And can I have a pony for Christmas, too?

Charlesst 06:42 16 Aug 11 This economic crisis is just the result of an accounting error. If the wealthy and corporations were taxed enough, held accountable, and the money redistributed down to labor, none of this would have happened. Thats why the post WWII years were so good. Money is demand, and wealthy rentiers, since about 1980, were allowed to accumulate, and are still accumulating, all the money. So demand is increasingly squeezed. The Producer-Consumer problem is a simplified version. See: http://anamecon.blogspot.com/2010/07/producer-consumer-problem-again.html But now that rentiers control the worlds governments, collapse may be inevitable. Remember the story? They killed the goose. Our masters have so much power they can no longer do the right thing, even for themselves. So concerned with preserving their money, mere nominal wealth, they let the real economy, the foundation of their nominal wealth, go to hell. They can only do wrong, to all our great harm. Pathetic, really. Marx said capital would drive out labor, and so destroy its own market, as well as any wealth labor, or even the middle class, might have. Marx said this would happen with unfettered capitalism. As far as I know, he didnt have much to say about banks and governments, which are complications. But now that governments are the creatures of capital, they, and the people they represent, are no longer a hindrance to the fulfillment of his prophesies. See: http://anamecon.blogspot.com/2011/08/some-homage-to-karl-marx.html Just another problem as we approach the end of oil and Malthusian limits, and throw in global warming, etc. This shows just how little the system, capitalism or what ever it is, is capable of dealing with reality.

pflanagan 09:29 16 Aug 11 It is outrageous how the notion of unfettered capitalism (deregulation, reduction in taxation and government spending) which have led us to this economic abyss continue to be touted as the solution to our economic problems. Why do these ideas continue to have currency and why is their failure not being examined in our critical discourse. Slavoj Zizek insightfully points out that when communism collapsed in Eastern Europe the politicians blamed the collapse on failure to adhere strictly or purely to their failed ideology. He observes that capitalism is clinging to its failed economic policies just as the communist countries in Eastern Europe clung to their failed economic policies. The Tea Party continue to advocate for less regulation , less taxes, less government as the once virtuous circle morphs into a death spiral. Advocates of free markets argue that interference in the markets lead to misallocation of capital and mis-pricing of goods. Ironically one of the important functions of market regulation is to ensure that goods are priced correctly. Regulation in the financial markets ensures that risk is priced correctly and in the goods market, environmental and consumer regulations ensure that good brought to market reflect their true costs. Deregulation is not healthy for markets in the long term and confers unfair economic advantages to some groups over others. Those who advocate less taxes and government spending fail to recognize that government is an important and essential part of the productive economy of any country. The infrastructure created by government is an essential aspect of wealth creation and must be funded. We need to start having more critical discussion about debt. Is all debt bad? Is all debt the same? Debt used to fund present liabilities is not the same as debt

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Is Capitalism Doomed? - Nouriel Roubini - Project Syndicate

http://www.project-syndicate.org/commentary/roubini41/English

used to invest in capital with long term returns. Some debt generates economic activity, some debt constrains economic activity. We need to find creative ways to expunge debt that constrains economic activity and perhaps introduce the concept of usury back into the lexicon. Contrary to those who clammer for higher interest rates, consumer interest rates are not reasonable or cheap.

rcwhalen 11:19 16 Aug 11 God I hope capitalism is doomed. The term "capitalism" is a Marxist creation. We need to move toward something higher, that values the individual and does not deify corporations, governments and other vehicles for collectivism. I wonder if the unlevered world of Jefferson and Adams is not the answer, a more localized world that is still able to benefit from technology and trade, but not in a way that is destructive. Keynes was right to question the value of global capital flows, especially when the debtor controls the means of exchange.

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