Doomsday warnings of US economic apocalypse gain
ground
Economists peddling dire warnings that the world's number
one economy is on the brink of collapse, amid high rates of
unemployment and a spiralling public deficit, are flourishing
here.
The guru of this doomsday line of thinking may be economist Nouriel
Roubini, thrust into the forefront after predicting the chaos
wrought by the sub-prime mortgage crisis and the collapse of the
housing bubble.
"The US has run out of bullets," Roubini told an economic forum in
Italy earlier this month. "Any shock at this point can tip you back
into recession."
But other economists, who have so far stayed out of the media
limelight, are also proselytizing nightmarish visions of the
future.
Boston University professor Laurence Kotlikoff, who warned as far
back as the 1980s of the dangers of a public deficit, lent credence
to such dark predictions in an International Monetary Fund
publication last week.
He unveiled a doomsday scenario -- which many dismiss as pure
fantasy -- of an economic clash between superpowers the United
States and China, which holds more than 843 billion dollars of US
Treasury bonds.
"A minor trade dispute between the United States and China could
make some people think that other people are going to sell US
treasury bonds," he wrote in the IMF's Finance & Development
review.
"That belief, coupled with major concern about inflation, could
lead to a sell-off of government bonds that causes the public to
withdraw their bank deposits and buy durable goods."
Kotlikoff warned such a move would spark a run on banks and money
market funds as well as insurance companies as policy holders cash
in their surrender values.
"In a short period of time, the Federal Reserve would have to print
trillions of dollars to cover its explicit and implicit guarantees.
All that new money could produce strong inflation, perhaps
hyperinflation," he said.
"There are other less apocalyptic, perhaps more plausible, but
still quite unpleasant, scenarios that could result from multiple
equilibria."
According to a poll by the StrategyOne Institute published Friday,
some 65 percent of Americans believe there will be a new
recession.
And the view that America is on a decline seems rather well
ingrained in many people's minds supported by 65 percent of people
questioned in a Wall Street Journal/NBC poll published last
week.
"It is true: Today's economic problems are structural, not
cyclical," argued New York Times editorial writer David
Brooks.
He said the United Sates is losing its world dominance much in the
same way the British Empire began to crumble more than a century
ago.
"We are in the middle of yet another jobless recovery. Wages have
been lagging for decades. Our labor market woes are deep and
intractable," Brooks said.
Nobel Economics Prize winner Paul Krugman also voiced concern about
the fate of the fragile economic recovery if voters return the
Republicans to political power.
"It's hard to overstate how destructive the economic ideas offered
earlier this week by John Boehner, the House minority leader, would
be if put into practice," he wrote in a recent editorial.
"Fewer jobs and bigger deficits -- the perfect combination."
The Wall Street Journal, usually more favourable to Boehner's call
for tax cuts, ran a commentary from another Nobel Prize-winning
economist -- Vernon Smith -- that failed to provide much comfort
for readers.
"This fact needs to be confronted: We are almost surely in for a
long slog," Smith wrote.
And it seems such pessimism has even filtered into the IMF, which
warned on Friday that high levels of national debt and a still
shaky financial sector threaten to derail the global economic
recovery.
"The foreclosure backlog in US property markets is large and
growing, in part due to the recent expiration of the home buyer's
tax credit. When realized, this could further depress real estate
prices."
This could lead to "disproportionate losses" for small and
medium-sized banks, which could in turn "precipitate a loss of
market confidence in the recovery," the IMF warned.
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