"Dr. Doom" rubbini: financial crisis in the second stage of the season

Ruby, known as "Dr. Doom", as early as 2006 is forecast to the current financial crisis and fame.

In the past, we are of the view that the financial crisis is every 50 years, a hundred years before the exception event will occur, but in recent years by financial history shows, the frequency of the financial crisis is becoming more and more high. Moreover, the causes of the crisis caused these also come with textbook on the result of the cyclical decline is not the same, it was known as the "balance" of financial crises: asset bubbles cause civil and Government departments had accumulated excessive debt.

This financial crisis is becoming increasingly common, General textbooks rarely mentioned, so I will write the Crisis Economics of this book. Because of the financial crisis has not "exception, abnormal" events, but more and more frequent and severe, causing enormous economic losses. So we must try to learn, to try to prevent it from happening.

Many people start talking about the crisis, they will think of "Black Swan" theory that financial markets will often unexpected crisis occurs. But I do not think that the crisis was a Black Swan event, in my new book, direct that the crisis is the event called "White Swan".

Two reasons: first, it should have been a long time before a crisis occurs once, now more and more frequent; second, the crisis is not a random occurrence, but the economic and financial policy failures caused by the results, we could see the problem.

Often people ask me: "why do you have a way to predict financial crisis happen?", in fact, not only was I had other people made a warning. Based on my own, for example, I once spent ten years time, the study of emerging economies, financial crisis, and in Washington for two years doing research, 2004, also wrote a book in response to emerging economies to financial crises in the book. Finished this book, I see the United States has asset bubbles, deficit, dollar overestimated, credit expansion. These are signs with the detonation of the financial crisis in emerging economies, almost exactly the same. Therefore, the financial crisis is predictable.

It was also said that since the United States, Europe, Japan and emerging economies have already started to recover, this unprecedented crisis is over?

In my opinion, the financial crisis will probably hasn't finished yet. We just before the end of its first phase, the second phase of the risk is very high. To those of the great depression, for example, the United States stock market crash in 1929, the United States economy in 1934 to 1937 gradually out of the recession, but because the policy mistakes that result in 1937 to 1939 and in a second phase of the depression.

So, the crisis had not gone out, and is undergoing change. Initial financial crisis, the private sector because of the excessive borrowing and lever, then there are the so-called "deleveraging" voice, request for a reduction in the debt ratio. But now, when the private sector efforts deleveraging, government departments, but a massive "then leveraged" (Re-leveraging): several industrial State budget deficit in GDP is around 10%. Many people worry that Greece's deficit on the 13 per cent of GDP, in fact, the United States deficit this year will be as high as 11% of GDP, and the United Kingdom may also be in more than 10%.

Government departments so "then leveraged debt accumulated huge", there are three reasons: first, the Government is declining automatic stabilization mechanism, for example in the people's unemployment provided subsidized; second, when civil demand weakens, the Government must increase its expenditure; third, the Government decided to hand the relief finance, real estate and enterprise.

These emergency economic stimulus policies, it is necessary, but the stimulus plan is not a "free lunch" and its sequel is a lot of government debt and deficit.

First, some countries (such as the United States, United Kingdom and Japan) can use the "monetization", that is, printed banknotes to solve budget deficit, but long-term it will lead to inflation.

Secondly, if you are the emerging economies (such as Russia and Argentina), or the euro area, some countries (e.g. Greece), since there is no way your printed notes, perhaps had to make debt default.

The event really occur twice in recession, the Government's it? a year ago, the crisis is serious, the Government also can draw interest, quantum lenient and other tools; United States can also 800bn fiscal stimulus, but also to relieve the financial industry. But now again into recession, the Government will find that they have used up all the "bullet" policy. Because interest rates have been reduced to zero, any further reduction would cause malignant inflation; you can't let the deficit and government debt continues to expand, because the market has a panic, but also in Greece, Spain, Portugal, Ireland and Iceland and other countries, like the sale of bonds by the bond market volunteer (Bond vigilantes) has begun wriggling, soon they will be on the United Kingdom, Japan and the United States these high deficit countries.

I am not forecasting recession in the second degree will happen, but I think that the Government debt and deficit increased significantly, mean that we are about to enter the second phase of the financial crisis.

At present, we must promote more bold reform. For example, I agree that the United Kingdom's Central Bank President Kim Eun, United States, President of the Council of the former Federal Reserve of the Walker, et al. argued that financial institutions if the "too big", it should be split, downsizing. Because the Bank if too big, the future will also be great to ride, and complex to manage risk.

Finance, Governments are now faced with the dilemma of the exits are, how to do it all. Especially for the so-called ' pigs in five countries (Portugal, Italy, Ireland, Greece, Spain), they not only face a deficit and the debt crisis, as well as international competitiveness decline in crisis. In the short term, these countries have significantly tightened, including tax and spending cuts, will certainly not conducive to economic growth, may even be extended recession. Challenge came when economic output continued to drop, the Government also

Do constraints, and maintain the stability of the debt and deficit?

Want to recover competitiveness, growth, there are three ways. The first is the use of deflation, also is to allow continuous decline in prices and wages for several years, until you find the competitiveness. But this method is not politically viable, because the price deflation is too large, no Government would accept for five consecutive years of recession, Argentina Government support for three years, let alone.

The second method is to promote the structural reforms. Germany is this: to promote enterprise restructuring, accelerate productivity growth, controlling wage took ten to fifteen years, the competition again. The problem is, Greece, Spain and other countries even today to do so, you want to see the results, at least five years, while long-term reform will bring short term pain, politicians would say that is too difficult.

Don't want to rely on deflation, and reluctant to substantially reform, the last method, if not out of the euro area, the sharp depreciation of the euro must, in order to regain competitiveness. But to do so, the ECB must agree to the use of extremely loose monetary policy, not just buying Government bond, also increase the money supply.