Nouriel Roubini, who is professor of economics at the Stern School of Business, New York University, and chairman of RGE Monitor, offers an interesting scenario of converging new-to-the-world economic conditions which most business managers and entrepreneurs have never seen in their lives and will need novel creative tactics and strategies to cope with.(A reversal in business thinking is needed-which ironically may save your business, but in the big picture will just prolong the recession/depression, if everyone's mental model shifts simultaniously-the paradox of self-interest vs the common good) (see Opportunity Recognition in Difficult Times and Do you know how to design and spot business opportunities? )
In an article called Crisis of Stag-Deflation, Roubbini postulates:
"With a global recession and fall in aggregate demand a near certainty, deflation -- rather than inflation -- will become the main concern for policy-makers. Rising unemployment rates will cap wage and labor costs, and further falls in commodity prices -- already down 30 percent from their summer peaks -- will only add to these deflationary pressures.
Policy-makers will have to worry about a strange beast called "stag-deflation" -- a recessionary combination of economic stagnation and deflation. They will also have to handle liquidity traps, when official interest rates become so close to zero that traditional monetary policy loses effectiveness. Third, they will confront debt deflation, the rise in the real value of nominal debts, which will increase the risk of bankruptcy for distressed households, firms, financial institutions and governments."With traditional monetary policy becoming less effective, nontraditional policy tools aimed at generating greater liquidity and credit will become necessary. And while traditional fiscal policy -- government spending and tax cuts -- will be pursued aggressively, nontraditional fiscal policy -- expenditures to bail out financial institutions, lenders and borrowers -- will also become increasingly important.
In the process, the role of states and governments in economic activity will be vastly expanded. Traditionally, central banks have been the lenders of last resort, but now they are becoming the lenders of first and only resort. As banks curtail lending to each other, to other financial institutions and to the corporate sector, central banks are becoming the only lenders around.
Likewise, with household consumption and business investment collapsing, governments will soon become the spenders of first and only resort, stimulating demand and rescuing banks, firms and households. The long-term consequences of the resulting surge in fiscal deficits are serious. If the deficits are monetized by central banks, inflation will follow the short-term deflationary pressures. If they are financed by debt, the long-term solvency of some governments may be at stake unless medium-term fiscal discipline is restored."
Higher taxes on energy (conventional fossil fuels), which business and consumers still largely depend on can't be rules out even in a recession / depression. Other governments may follow suit. According to the Wall Street Journal:
President-elect Barack Obama's pick for energy secretary, Dr. Steven Chu, who is a Nobel Prize-winning scientist [and former head of Batelle Labs] is on the record calling coal a "nightmare" and advocating raising U.S. gas taxes to European levels to promote conservation. (Here's video of the speech; the "nightmare" quote comes 28 minutes in.)
© 2005-2008
Walter Derzko
Expert, Consultant and Guest Speaker on emerging Smart Technologies, Strategic Planning, Business Development, Lateral Creative Thinking and author of an upcoming book on the Smart Economy "
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