Sunday, August 14, 2011

Roubini - Marx was right.

The prophet of doom Nouriel Roubini who predicted back in 2007 the massive financial collapse that occurred in the Fall of 2008 is at it again.
Marx, among other theories, argued that capitalism had an internal contradiction that would cyclically lead to crises, and that, at minimum, would place pressure on the economic system.

Companies, Roubini said, are motivated to minimize costs, to save and stockpile cash, but this leads to less money in the hands of employees, which means they have less money to spend and flow back to companies.

Now, in current financial crisis, consumers, in addition to having less money to spend due to the above, are also motivated to minimize costs, to save and stockpile cash, magnifying the effect of less money flowing back to companies.

"Karl Marx had it right," Roubini said in an interview with "At some point capitalism can self-destroy itself. That's because you can not keep on shifting income from labor to capital without not having an excess capacity and a lack of aggregate demand. We thought that markets work. They are not working. What's individually a self-destructive process."

Roubini added absent organic, strong GDP growth -- which can increase wages and consumer spending -- what's needed is large fiscal stimulus, agreeing with another high-profile economist, Nobel Prize-winner Paul Krugman, that, in the case of the United States, the $786 billion fiscal stimulus approved by Congress in 2009 was too small to create the aggregate demand necessary to advance the U.S. economic recovery to a self-sustaining expansion.

Absent additional fiscal stimulus, or unexpected strong GDP growth, the only solution is a universal debt restructuring for banks, homes (essentially households/families), and governments, Roubini said. However, no such universal restructuring has occurred, Roubini said.

Without that additional fiscal stimulus, that lack of restructuring has led to "zombie houses, zombie banks, and zombie governments," he said.

No Good Choices Outside of Fiscal Stimulus or Debt Restructuring

The United States, Roubini said, can in theory: a) grow itself out of the current problem (but the economy is currently growing too slowly, hence the need for more fiscal stimulus); or b) save itself out of the problem (but if too many companies and citizens save, the flaw Marx identified is magnified); or c) inflate itself out of the problem (but that has extensive collateral damage, he said).

However, Roubini said he did not think the U.S. or the world are now at the point where capitalism in self destructing.

"We're not there yet," Roubini said, but he did add that the current trend, if it continues, "runs the risk of repeating the second leg of the Great Depression" -- the 'mistake of 1937.'
The shock headline "Marx was right" ignores the fact that everything Roubini is reported here to have said is well-proven conventional modern macroeconomics. Everyone in the economics business and most honest bankers (there probably are at least two out there) know quite well that what Roubini says is true. The existing economic models all have this built into them! There is no honest argument!

Businesses cannot continue to hoard cash while cutting wages en mass and still have an economy which can afford to buy the products and services the businesses make. But at the same time, no single business is going to start hiring and paying more wages if the market does not exist. This conundrum can only be resolved by the government directly creating jobs and putting money into the hands of consumers.

No comments: