Roubini Worried by 'Runaway Fiscal Deficits'

Stock market volatility is likely to increase as investors are faced with the dilemma of government and central banks' exits from stimulus strategies, economist Nouriel Roubini told CNBC Tuesday.

Photo: Oliver Quillia for CNBC Nouriel Roubini

Exit policies pose a "damned if you do, damned if you don't" dilemma, as withdrawing stimulus too soon could push economies back into recession, while leaving it too long would push already high fiscal deficits even higher, Roubini, who predicted the 2007 financial crisis, explained.

A near-depression was avoided through a "massive monetary and financial stimulus," but at the cost of doubling the public debt and now the main worry was "runaway fiscal deficits," he added.

There is a gridlock in Congress over fiscal policy, as Republicans are vetoing raising taxes while Democrats veto cuts in spending, and this does not bode well for the deficit, according to Roubini.

"If we cannot raise tax or cut spending the path of least resistance is going to be running the printing presses," he warned.

The VIX volatility index fell to below 20 points from close to 48 points a year ago, with analysts saying this is due to the fact that investors think the worst is over for the economy.

Roubini said he was "skeptical" on whether the recovery will be robust enough once the stimulus is withdrawn, adding that the US gross domestic product should grow at a rate of 6 to 7 percent.

There is a risk the economy will falter again especially in the second part of the year, when the stimulus runs out, Roubini said.

"Certainly I see more volatility ahead of us," he added.

Last week, Roubini wrote in a research paper that poor economic data in the US coupled with Europe's debt crisis are contributing to an increase of the risk of the US economy going through a double-dip recession.

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