World Economy

Roubini: Why QE isn’t working

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Unconventional central bank policies, including quantitative easing (QE) have failed to spur either inflation or growth as fiscal austerity continues to bite, Nouriel Roubini said in an op-ed for Project Syndicate.

"We live in a world in which there is too much supply and too little demand," wrote Roubini, the bearish economist known as "Dr. Doom," who successfully called the housing crash leading into the Global Financial Crisis. "The result is persistent disinflationary, if not deflationary, pressure, despite aggressive monetary easing."

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The reason all that easing hasn't caused inflation is because the post-2008 economic recovery has been anemic, amid a "painful deleveraging" after large buildups of both public and private debt, said Roubini, the head of Roubini Global Economics and a professor at New York University.

A host of factors have weighed on efforts to use monetary policy to spur inflation, he said, citing an output gap with firms facing limited pricing power and too many unemployed workers chasing too few jobs.

ECB's QE: When will the economic benefits show?
ECB's QE: When will the economic benefits show?

"Rising income inequality, by redistributing income from those who spend more to those who save more, has exacerbated the demand shortfall," Roubini said.

He also noted that property markets where booms turned to busts and rising bubbles in some other markets also pose risks. In addition, weaker commodity prices, in part due to China's slowdown, are spurring deflation, worsened by the mainland causing a global glut of manufactured and industrial goods, he said.

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Unconventional policies try to prevent deflation by weakening the currency and improving exports, but this "is a zero-sum game that merely exports deflation and recession to other economies," he said.

"To be effective, monetary stimulus needs to be accompanied by temporary fiscal stimulus, which is now lacking in all major economies. Indeed, the euro zone, the U.K., the U.S., and Japan are all pursuing varying degrees of fiscal austerity and consolidation," Roubini wrote.

He believes the International Monetary Fund's prescription for public investment in infrastructure is "compelling," but political constraints make it unlikely.

"This adds up to a recipe for continued slow growth, secular stagnation, disinflation, and even deflation," Roubini said.

Concerns the global economy faces a self-defeating spiral are gaining currency with other analysts as well.

"We're old, we're indebted and we're unequal. And if that happens, nominal growth just slows down," Ajay Kapur, head of Asia-Pacific and emerging markets strategy at Bank of America Merrill Lynch, told CNBC.

"Old people don't spend that much money. When you're indebted, the productivity of credit growth goes down" and the savings rates of the rich have gone from 20 percent pre-crisis to 40 percent currently, Kapur said.

"Mathematically, it's very difficult to push the economy forward, which is why you almost live in a world of perpetual QE, which is why we've been saying for a few years now that we're going to see low interest rates pretty much forever."

See Nouriel Roubini's op-ed in Project Syndicate here.