Tags: Roubini | unknown | Fed | economy

Roubini: This Fall Is Full of 'Known Unknowns'

Tuesday, 03 Sep 2013 09:23 AM

By Michael Kling

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This autumn is full of "known unknowns" that could derail the global economy's shaky recovery, says Nouriel Roubini, a professor at New York University's Stern School of Business and chairman of Roubini Global Economics.

"And the meta-risk of policy mistakes and accidents remains very high," Roubini writes in an article for Project Syndicate.

Roubini cites three domestic known unknowns: tapering of the Federal Reserve's quantitative easing stimulus, the selection of a new Federal Reserve chairman to replace Ben Bernanke and a possible government shutdown due to a partisan battle over the U.S. debt limit.

Editor’s Note:
5 Reasons Stocks Will Collapse . . .

Uncertainties over the Fed have already prompted long-term interest rates to increase, Roubini says. Yet investors have been complacent about the approaching debt limit, believing the controversy will once again end with a last minute compromise.

"But investors seem to underestimate how dysfunctional U.S. national politics has become," he explains. "With a majority of the Republican Party on a jihad against government spending, fiscal explosions this autumn cannot be ruled out."

Uncertainties also abound overseas, Roubini adds.

The eurozone's anemic recovery is at risk; the European Central Bank, as well as the Bank of England, may be unable to prevent rates from rising; governments in Italy and Greece could collapse; and political tensions in Spain and Portugal might increase.

It's not clear if Japan will implement structural reforms and trade liberalization to boost growth, and the expected rise in the consumption tax in 2014 might choke economic recovery.

Many emerging markets suffer from large current account deficits, fiscal deficits, slowing growth and inflation. They lack easy choices. Supporting their currencies with higher rates would kill growth; lower rates could unleash inflation.

"Now that the party is over, the hangover is setting in," he notes.

U.S. military strikes against Syria could be limited in time and scope. On the other hand, they could trigger a wider confrontation. Also, Israel may lose patience with economic sanctions that have failed to halt Iran's nuclear weapons effort. Military conflict or even saber rattling could prompt energy costs to spike.

"The last thing that a fragile global economy needs now is another round of peak oil prices," Roubini warns.

Unless Congress raises the debt ceiling, the government will run out of money in mid-October, according to Treasury Secretary Jack Lew. Congress should act as soon as it returns because the government cannot precisely predict when it will run out of money, Lew said, The Washington Post reported.

"In just a few weeks, we will find ourselves once again perilously close to breaching the debt ceiling if Congress fails to act," Lew said. "We cannot afford for Congress to wait until some unknowable last minute to resolve this matter on the eve of a deadline."

Editor’s Note: 5 Reasons Stocks Will Collapse . . .

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