Global Economy Is Entering Stag-Deflation: Roubini

Since I have been  busy dodging snow storms and paying attention to my day job (which has been enhanced by the financial crisis), I have not been able write as much as I would like here.  There are many important developments on the economic front, and it seems that each day, another factor arises or changes, which in turn alters the outlook.  In the absence of my own analysis today, I would like to highlight an article written by Professor Nouriel Roubini.  My outlook for 2009 is admittedly dark, but I do see the possibility of a very narrow path that, with the right government intervention, the economy could travel where we would not fall into a deflationary spiral.  Professor Roubini does not share my, albeit slight, optimism.

Here is a bullet point summary of the article:

• The Federal Reserve’s balance sheet has jumped from $800 billion to more than $2 trillion as it lowers the federal funds target rate to a range between 0 and .25 percent
• Despite the unorthodox moves by the Fed, the U.S. and global economy risks a protracted bout of stag-deflation (anemic economic growth among falling prices in all asset classes)
• The U.S. recession will likely last until December 2009, with cumulative GDP likely falling more than 5 percent;
• Unless there is aggressive fiscal policy that includes a recapitalization of banks, the recession could morph into a Japansese-style “L” shape (a steep economic decline followed by a long period of zero growth)
• A recession in Russia in 2009 and a “near recession” (zero growth) in Brazil
• A sharp slowdown in what was white-hot growth in India and China; China’s GDP could fall to 5 percent, a much more rapid decline than currently expected [trade tip: ProShares Ultra Short FTSE/Xinhua China 25 (ticker symbol: FXP) gains in value at 2x the rate of declines in the FTSE/Xinhua China 25 index]
• More aggressive policy actions may be undertaken by the Fed as a severe credit crunch shows no signs of relenting.

If you are interested, you may read the full article here.

[SOURCE: Helicopter Ben goes ZIRP, QE and More…While the Global Economy Enters Stag-Deflation, Nouriel Roubini, RGEMonitor.com