Nouriel

Nouriel Roubini · @Nouriel

14th Aug 2011 from Twitlonger

From my new paper Global Financial Crisis 2.0: How to Rescue Capitalism at www.roubini.comThe only sector with a sound balance sheet is low-levered high-grade corporates. But tail risks have led to cautionary behavior by firms that are on an investment and job-hiring strike given the fog of uncertainty and the option value of waiting in times of risk. But here is a Catch 22: Firms are not hiring—and are actually shedding more jobs—as there is not enough final demand. But if firms hire less and/or fire more there are not enough jobs and labor income and thus consumption and final demand are weaker, making the double dip self-fulfilling. Worse, in the past few years, the secular worsening in the distribution of income has gotten worse since, during and after the financial crisis, income has shifted from labor to capital and from wages to profits as firms have slashed costs and jobs to survive and thrive. But what is individually rational—slash jobs to survive and profit—is in aggregate destructive of labor income and aggregate demand. Indeed, the marginal propensity to spend of workers/households is larger than that of the corporate sector, which has a greater propensity to save than households (even more so when the fog of uncertainty from tail risk leads to the option value of waiting). Thus, this redistribution of income is reducing aggregate demand when there is already a glut of capacity given the excess capacity in anemically growing advanced economies and the massive overcapacity in China (given over-investment), and there is a lack of aggregate demand given the deleveraging of households and governments.

Capitalism in Danger

So, the painful process of the deleveraging of households, banks, financial institutions, highly leveraged corporates, local and central governments has barely started and debt reductions will become necessary if countries cannot grow or save or inflate themselves out of unsustainable debt problems.

In this sense, Karl Marx was partially right in arguing that globalization and financial intermediation run amok and the redistribution of income and wealth from labor to capital could lead to capitalism self-destructing (he was only partially right as his view that socialism would be a better economic system than capitalism turned out to be utterly wrong). Indeed, if there is not enough labor income given rising income/wealth inequality, there is a structural lack of aggregate demand especially when debt burdens don’t allow households to borrow to bridge the gap between anemic incomes and spending goals. And recent riots from the Middle East to the UK and massive popular demonstrations in Israel (and rising popular anger in China) and soon enough in other advanced economies and EMs (if advanced economies were to double dip) are all driven by the same issues and tensions: Rising income and wealth inequality, poverty and unemployment and hopelessness in both the working class and even the middle class, which are feeling the squeeze of falling incomes and opportunities. In the U.S., we are now back to a second Gilded Age as income and wealth inequality is as high as in 1929 at the onset of the Great Depression after the Gilded Age of the 1920s. And after five rounds of unsustainable tax cuts in 2001-10, federal tax revenues are now at a 60-year historical low of 14% of GDP, when the U.S. historical average is 19%

Reply · Report Post