Roubini, says out loud what is on a lot of minds, here it is, I give you... the STAG-DEFLATION. Where the economy stagnates and the assets deflate, as monetary volumes shrink.
Thus spoke Roubini:
The financial wildfire has turned around the stagflationary trends seen earlier this year into a vicious cycle of global deflation in debt, assets, wages, and goods. Headline consumer inflation has peaked in most of the developed and emerging world, except in places where food/fuel subsidies were recently rolled back or post-Q3 data are still unavailable. According to the IMF’s October World Economic Outlook, the world’s average consumer prices have increased 6.2% y/y Q2 2008. JPMorgan expects world CPI inflation to slow to 2.6% y/y Q2 2009. Lower commodity prices subdued headline inflation and are expected to continue doing so on slackening global demand. Core inflation has yet to show a significant decline but a feedback loop of debt deflation, asset deflation, commodity deflation, wage deflation, and slower global growth will likely lead to flat or lower headline and core consumer and producer prices in Q4 2008 through 2009. But in the short- to medium-term, stag-deflation seems the most likely scenario for the world economy.
The continued fall of U.S. house prices has morphed into global de-leveraging, which threatens to spark global deflation. Debt deflation at first sent investors seeking safety in commodities as inflation accelerated worldwide due to the weakening dollar. The dollar weakened as the world seemed resilient to the U.S. slowdown. But the lag between U.S. growth and growth in the rest of the world soon ended and so did the lag between growth and inflation.
But fear not, gentle people. The government is on the case and helicopter Ben has $3T bags to drop. At that level the needs at home would be so great they would dwarf the war economy. Make finance not war.
The question is, what does the monetary mass want to do? does it want to deleverage? the micro picture says yes, quite violently, see the hedge funds for example. Can the US government maintain its monetary supply constant? Many argue that it is already outside the purview of the FED and the Treasury, the private markets set money levels.
Then the question becomes "how much shock absorption can the government provide?" and the answer to that is "quite a bunch". US: 14T/yr, even at a DEPRESSED 10T/yr a bill of 5T is manageable over a long period of time. Say 10 years. That would be 5% of GDP for 10 years. That's a big number but a whole lot of dough that is going to flood the US.
Now remember that a reduction in money levels will set prices almost linearly. So a reduction of 25% in money levels will give us a 10T economy. GDP -25%??? In money levels, yes.