Nouriel Roubini, the New York University economics professor also known as Dr. Doom for his dire predictions about the economy, remained true to his identity when he tweeted Wednesday that the chances of a "double dip" recession are now more than 40%. In an interview with CNBC (GE) this morning Roubini explained his reasoning, saying that not only the second half of 2010 be worse than the first half, but that the government and the Federal Reserve are out of policy moves to stimulate the economy.
Like many economists, Roubini predicts that second-quarter gross domestic product growth will be revised down to an a annual rate of 1.2% from an initial reading of 2.4%. Additionally, a "series of tailwinds in the first half of the year ... are going to be essentially headwinds" in the second half, like the inventory adjustments which has run its course. The fiscal stimulus will actually become a drag on growth in the second half.
For example, the employment boost from the census survey will disappear, as will several tax credits and other policies, such as the cash-for-clunkers car trading program, the first-time homebuyer's tax credits, and cash for green appliances. These were all temporary. Therefore, growth for the rest of the year will be closer to zero than 1%, Roubini predicted.
This Year More Troubling Than Last?
What's perhaps even more discouraging is that the policy outlook looks worse than before. Last year, when economy was in free fall, the Fed pushed interest rates to zero, and the government initiated a 10% of GDP fiscal stimulus of $800 billion. Oh, and billions more went toward avoiding a complete collapse of the financial industry.
One sign of the downshifting of policy ambitions: Last year lawmakers approved that $800 billion stimulus; this year they're debating over a mere $20 million aid for unemployment.
Similarly, from a monetary policy perspective, the scenario is worse than last year, Roubini said. "Banks today are sitting on $1 trillion of excess reserves that they are not lending out" and on which they are earning 0.25%. The U.S. is facing a "liquidity trap," Roubini said.
Now, with companies discounting prices and a glut in the labor market, the biggest threat to the economy is deflation. On this score Dr. Doom has more ... gloom to offer: "In the short run we may end up like Japan in a severe deflationary trap."
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