Tags: Roubini | Fed | China | global

Roubini: Investors Are Whistling Past the Graveyard

By    |   Tuesday, 01 April 2014 11:16 AM

The global economic risks that threatened the world a year or two ago have diminished like smoke, only to be replaced by a new set of worries ranging from war to national collapse, according to New York University economist Nouriel Roubini.

Roubini, noted for his bearish bent and his correct prediction of the 2008 housing bust and subsequent international economic meltdown, wrote in a Project Syndicate column that yesterday's crises are old hat.

The old risks included a eurozone breakdown, U.S. government shutdowns, global deflation and potential war over Iranian nuclear proliferation.

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The new global problems to worry about?

"For starters, there is the risk of a hard landing in China," he said. Each time GDP growth in China slows toward 7 percent, Chinese authorities "double down" on credit infusions that lead to more bad assets and non-performing loans — a situation he noted could spiral beyond control.

A second big risk is that of potential policy mistakes by the Federal Reserve as it exits monetary easing. "Some investors and governments now worry that the Fed may raise rates too soon and too fast, causing economic and financial shockwaves."

The third big risk, according to Roubini, is the opposite of the second — that the Fed exits too slowly. "Indeed, unconventional monetary policies in the U.S. and other advanced economies have already led to massive asset-price reflation, which in due course could cause bubbles in real estate, credit and equity markets."

Other potential crises to keep investors awake at night include the threats of collapses in emerging markets, the possibility of the Ukraine conflict leading to a shooting war if Russia invades further in Eastern Europe and the potential for the territorial disputes between China and Japan to likewise end in military conflict.

So far, investors seem convinced none of these new potential flashpoints will turn hot, Roubini stated. "But investors may be deluding themselves that the probability of these risks is low — and thus may be unpleasantly surprised when one or more of them materializes.

"Indeed, as was the case with the global financial crisis, investors seem unable to estimate, price and hedge such tail risks properly. Only time will tell whether their current nonchalance constitutes another failure to assess and prepare for extreme events."

The latest world outlook from the International Monetary Fund (IMF) is fairly optimistic, and includes the assertion that U.S. GDP could accelerate to 2.8 percent in 2014.

But the IMF concedes the global economy is not "out of the woods yet."

The IMF notes that deflation could yet take hold in advanced economies, and that emerging economies could suffer measurably from a global trend toward withdrawal of monetary stimulus measures.

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The global economic risks that threatened the world a year or two ago have diminished like smoke, only to be replaced by a new set of worries ranging from war to national collapse, according to New York University economist Nouriel Roubini.
Roubini,Fed,China,global
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2014-16-01
Tuesday, 01 April 2014 11:16 AM
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