Damned if you do, damned if you...

If there ever was an award for visible grouchiness among economists, Nouriel Roubini would win it with a casually weary droop of his facial muscles.

The Harvard economist who famously — and accurately — foresaw the subprime housing crisis and its catastrophic impact on financial markets years ago perhaps takes the title bestowed on him — ‘Dr Doom’ — so seriously that he sports a permanently dyspeptic look, and the manner of one who bears the weight of the world on his sturdy shoulders.

It’s hard, of course, for him to convey a sunny disposition when he’s unveiling apocalyptic scenarios for economies, as he frequently does. But what about when he has a moderately upbeat outlook to convey, as he momentarily did in Hong Kong on Thursday?

“There is some good news,” he said, but the perma-scowl never left his face.

“After the most severe global economic recession and financial crisis, there is light at the end of the tunnel.”

The global economy has bottomed out and a recovery is taking effect, for which policymakers deserve credit “for doing the right thing for the time being.”

But it isn’t long before the downward spiral of his assessments begins again.

“But the fact is,” he says, in his monotonous rat-a-tat manner, “superloose monetary policy in the US is leading to global monetary easing, with excess of liquidity and credit creation, and is blowing asset bubbles around the world — in emerging markets, commodities, equities…

And if these bubbles are to go on for much longer, funded by a dollar-carry trade, there could eventually be an unravelling and a significant correction of asset prices, which will be damaging for global and regional economic growth.”

In fact, he reckons, a slowdown in growth in US, Europe and Japan in the second half of 2010 “could mark the beginning of a market correction because the macroeconomic news (in developed economies) will surprise on the downside.”

Emerging markets, including China and India, would not be immune to this correction, although their economic condition is far more robust than those of advanced economies, says Roubini.

China and India, he points out, are already beginning to feel the pinch of inflation and extraordinary asset price rises, and “if this overheating were to continue, if this easy monetary policy were to continue, and there is a massive slowdown of economic growth in advanced economies, that might also lead to a correction in emerging markets.”

Even in his best-case scenario, the recovery in advanced economies — the US, Europe and Japan — would be “anaemic, sub-par and below trend.”

So much so that in the short run, despite fears of hyperinflation, advanced economies in fact face far more deflationary pressures.

“However, over the medium term, maybe by 2012, inflation would come back — given the large and monetised fiscal deficits and easy monetary policy.”

Monetary policymakers in advanced economies face a dilemma with their exit strategies — the withdrawal of the superloose monetary and fiscal policies.    

“They could take the mounting budget deficits and easy monetary policy seriously and cut spending sooner rather than later, and mop up liquidity. But there’s a risk that they could make the same mistake that Japan did between 1998 and 2000 - when they raised rates too soon and ended up with a double-dip recession.”

The risk on the other side, however, is that policymakers maintain their fiscal stimulus, and keep up with their spending through fiscal deficits.

“And since they’d rather not take the politically unpopular decision of raising taxes of cutting back on spending, the path of least political resistance is to keep on running the printing presses by monetising the deficits.”

In that event, the risk of inflation kicks in, requiring long-term interest rates to be pushed high.

In other words, for the policymakers it’s a case of “damned if you do and damned if you don’t.” The path of exit, he says, is “very narrow and knife-edged. And especially in an election year in the US, the risk of a major policy mistake is significant.”

And on that decidedly cheerless note, Roubini strutted off, a scowl punctuating his face.