Nouriel Roubini: Threat of double-dip days ahead

If the natural cycle of laissez faire capitalism
revolves between risk and aversion
what should happen if government intervention perverts the process
to forestall short term economic pain?

The global economy, artificially boosted since the recession of 2008-2009 by massive monetary and fiscal stimulus and financial bailouts,
is headed towards a sharp slowdown this year as the effect of these measures wanes.
 
Worse yet, the fundamental excesses that fueled the crisis
– too much debt and leverage in the private sector
(households, banks and other financial institutions, and even much of the corporate sector)
– have not been addressed.
 
Private-sector deleveraging has barely begun.

 Does intervention delay real recovery?

Moreover, there is now massive re-leveraging of the public sector in advanced economies,
with huge budget deficits and public-debt accumulation...
 
...the countries that spent too much
– the United States, the United Kingdom, Spain, Greece, and elsewhere
– now need to deleverage and are spending, consuming, and importing less.
 
...The global slowdown – already evident in second-quarter data for 2010
– will accelerate in the second half of the year.
 
Fiscal stimulus will disappear as austerity programs take hold in most countries.

Did some stabilize financial markets in the short term
to defend political legacies and financial interests
regardless of long term consequences? 

Inventory adjustments, which boosted growth for a few quarters,
will run their course.
 
The effects of tax policies that stole demand from the future
– such as incentives for buyers of cars and homes
– will diminish as programs expire. 

At what point do bailouts do more harm than good?

Labor-market conditions remain weak,
with little job creation and a spreading sense of malaise among consumers.
 
...Mediocre job creation and a further rise in unemployment,
larger cyclical budget deficits, a fresh fall in home prices,
larger losses by banks on mortgages, consumer credit, and other loans,
and the risk that Congress will adopt protectionist measures against China...
 
In the eurozone, the outlook is worse.
 
...Sharp rises in sovereign, corporate, and interbank liquidity spreads
will increase the cost of capital,
and increases in risk aversion, volatility, and sovereign risk
will undermine business, investor, and consumer confidence further.
 
...any additional shock could tip this unstable global economy
back into full-fledged recession.
 
...The eurozone’s sovereign-risk problems could worsen,
leading to another round of asset-price corrections,
global risk aversion, volatility, and financial contagion.
 
A vicious cycle of asset-price correction and weaker growth,
together with downside surprises that are not currently priced by markets,
could lead to further asset-price declines and even weaker growth
– a dynamic that drove the global economy into recession in the first place.
 
...policymakers are running out of tools.
 
...there is little room for further fiscal stimulus in most advanced economies,
and the ability to bail out financial institutions that are too big to fail
– but also too big to be saved – will be sharply constrained.
 
...Avoiding double dip recession will be difficult.
 
In such a world, recovery in the stronger emerging markets
– the great hope for the global economy – will suffer,
because no country is an island economically.
 
...Fasten your seat belts for a very bumpy ride.

Nouriel Roubini