Roubini on Deflation

The reason ultra-low inflation remains a problem is that the traditional causal link between the money supply and prices has been broken. One reason for this is that banks are hoarding the additional money supply in the form of excess reserves, rather than lending it (in economic terms, the velocity of money has collapsed). Moreover, unemployment rates remain high, giving workers little bargaining power. And a large amount of slack remains in many countries’ product markets, with large output gaps and low pricing power for firms (an excess-capacity problem exacerbated by Chinese overinvestment).






 Nouriel Roubini is an American professor of Economics at New York University`s Stern School of Business and chairman of RGE Roubini Global Economics

Nouriel Roubini: Deflation Needs Monetary, Fiscal Policy

Jan. 21 -- NYU Stern School of Business Professor Nouriel Roubini, discusses the need for a combination of monetary and fiscal policy in the fight against deflation. He speaks with Tom Keene from the World Economic Forum in Davos, Switzerland on “Bloomberg Surveillance.”






Nouriel Roubini is an American professor of Economics at New York University`s Stern School of Business and chairman of RGE Roubini Global Economics

In Japan Abe boosted Growth and stopped Deflation

In Japan, the first two “arrows” of Prime Minister Shinzo Abe’s economic strategy – monetary easing and fiscal expansion – have boosted growth and stopped deflation. Now the third arrow of “Abenomics” – structural reforms – together with the start of long-term fiscal consolidation, could lead to debt stabilization (though the economic impact of the coming consumption-tax hike is uncertain). - in project-syndicate


 Nouriel Roubini is an American professor of Economics at New York University`s Stern School of Business and chairman of RGE Roubini Global Economics

I don’t see the risk of outright Deflation with exception of some countries of the Euro periphery

How realistic is a deflation scenario in the industrialized countries, the Japanification?
 
Japanification would imply stagnation and outright deflation. As long as growth remains below trend, inflation is going to be low, but I don’t see the risk of outright deflation with exception of some countries of the Euro periphery: As long as Germany is not willing to reflate, internal devaluation is forced upon the periphery. It would be better if Germany allowed inflation to go beyond 2%.




 Nouriel Roubini is an American professor of Economics at New York University`s Stern School of Business and chairman of RGE Roubini Global Economics

Roubini : There is a global deflationary risk

”There is a global deflationary risk,” says Nouriel Roubini, economics professor at NYU Stern School and chairman of RGE Monitor. “That’s what central bankers are worried about.”.”The Fed is trying to preemptively avoid a deflation trap [which] is very dangerous,” Roubini says. “Whether they’ll be successful or not, I don’t know.”The problem, he says, is there’s going to be a “severe recession”

Nouriel Roubini There Is a Global Deflationary Risk

Central bankers around the world are pulling out all the stops in order to combat a severe economic downturn that threatens to get even worse."There is a global deflationary risk," says Nouriel Roubini, economics professor at NYU Stern School and chairman of RGE Monitor. "That's what central bankers are worried about."In Europe today, the ECB and Bank of England slashed rates by greater than expected levels. Meanwhile, the Fed and Bank of Japan are taking "unorthodox actions" to pump liquidity into their economies. Both central banks are engaged in "quantitative easing," meaning rates are effectively zero regardless of what the official policy is."The Fed is trying to preemptively avoid a deflation trap [which] is very dangerous," Roubini says. "Whether they'll be successful or not, I don't know."The problem, he says, is there's going to be a "severe recession" both in the U.S. and globally in 2009. That means falling demand for goods and increased slack in the labor markets. That will put further downward pressure on prices and raise the risk of outright deflation, which is defined as: A persistent decline in general price levels, typically accompanied by a severe contraction in employment and economic output."It's hard to undo the structural factor" of falling demand meeting a supply glut of goods and services, he says, recommending the following policy actions to try and stem the deflationary tide:

A "huge" fiscal stimulus package: $500-$700B.
Recapitalize the banks faster, i.e., get TARP money distributed sooner.
Rather than focusing on mortgage rates, reduce the face value of debt owed by "insolvent homeowners" in order for them to be able to spend again and avoid a "tsunami of foreclosures." via youtube