Roubini - Withdrawing Stimulus Would Be Very Dangerous

"The downside risk to growth is significant so taking stimulus away now is a huge mistake," Nouriel Roubini told CNBC today.

There will be "massive deleveraging" of the consumer and of the private sector in the euro zone and in the UK, according to Roubini.

See:, here .


Roubini's comments are in stark contrast to the macho cutting agenda being pursued by Governments around Europe like the Liberal-Tory Government in Britain. Of course, as I've written in the past whether the Capitalist State actually allos Governments to carry through such policies which are not in the current interests of Capital, is another matter. In the past even, Governments like that of Margaret Thatcher and Ronald Reagan, despite talking tough, did not actually reduce the size of the Capitalist State, even during a period when the issues were more stark than today. More likely is that easy targets will be picked off. Some attacks on Welfare payments, and attacks on Public Sector pay and pensions.

What much of the talk is about now is really the kind of trick that conjuuror's pull-off. It is to make the audience look the other way. So long as workers, particularly Public Sector workers, are looking at the possibility of massive job cuts, they will not see the real threat coming towards them - inflation. Last year Public Sector pensions did not go up, but RPI inflation is currently standing at over 5%. That already means a 5% cut in real terms. Workers will more likely accept a pay freeze if they think they have dodged the bullet of losing their job, or if they think that by doing so they might dodge that bullet. That is a significant factor in reducing the deficit by throwing the cost on to the backs of workers given the size of the Public Sector wage bill. Freezing workers wages when inflation is running at over 5% represents a significant wage cut. That is even if we don't believe that 5% significantly understates the inflation that many workers actually face.

Worse, in this months budget it looks certain that the Government will push up VAT, perhaps to 20%. That will give another powerful twist to the inflationary spiral at a time when the lax money supply means that there is plenty of money in circulation to monetise such increases. And as I have pointed out in the past, another big shunt to inflation is heading to us down the road. The Chinese Stalinists are pushing through and encouraging huge pay rises for Chinese workers - rises of between 30-50%. This is part of a move to shift the balance of the economy towards the domestic market, and also covers some increases in the prices of imported wage goods, particularly food. But, in addition the rapidly rising import prices that China is facing gives a big incentive to raise the value of the RMB as against the dollar. That would reduce Chinese Import prices significantly reducing manufacturing costs, and also reducing the costs of importing food etc. for its massively increasing workforce. But, it would mean that all of those very cheap Chinese manufactured goods that we have become addicted to will also rise in price significantly.

I have been warning for some time that the real means for the State to pay off the debt would be through a big dose of inflation. Everything I see at the moment tells me that remains the case, whatever the headlines about cuts.