Roubini: More Than A Soft Patch (And QE3 is on the Way)

By Top Gun Team

According to the latest Wall Street Journal economic forecasting survey, sluggish hiring along with a lowered estimate of job creation anticipated in the next year are the leading threats to an economic rebound. News that the nation�s unemployment rate shot above nine percent last month has only intensified economists� fears that the less-than-inspiring performance of the economy could persist for years to come.

Thus, the debate over what action to take to ignite expansion and how to create much-needed jobs endures.

Nouriel Roubini, a.k.a. �Dr. Doom,� the head of Roubini Global Economics, an independent, global economic and market strategy research firm, believes that the answer will be another round of quantitative easing by the end of the year, specifically if the stock market drops to 10 percent or if economic data continues to worsen.

�The pressure is going to be on the only policy that is available, [that] is another round of quantitative easing,� Roubini said.

In an effort to lift the U.S. from its economic downturn, the Fed has already implemented quantitative easing twice. The monetary policy entails the government buying billions of dollars of U.S. Treasuries in an effort to pump money into the economy and encourage activity.

Already, the central bank has slashed interest rates to nearly zero and purchased over $2 trillion in government bonds to pull the economy out of recession.

Historically, economic recoveries in the U.S. have gained momentum with time; yet a year and a half after rising from the deepest recession since the Great Depression, the economy is only barely hanging on, given the bleak unemployment rate, now at 9.1 percent, the stock market dipping below 12,000 for the first time since March, European sovereign debt and the general outlook on the state of the global economy.

Another significant problem falls on the demand side of the economic equation, considering that nearly 70 percent of the U.S. economy is based on consumer activity. Since 2008, consumers have taken quite a few blows: falling housing prices, wages adjusted for inflation, disappearing jobs, etc� Under such circumstances, the public is weary of spending, but without spending, jobs cannot be created.

With this in mind, former Labor Secretary for the Clinton administration, Robert Reich has publicly advocated an additional federal stimulus, in an attempt to drive economic activity, suggesting the private sector is lagging; therefore, the government must intervene, as it has for 2/3 of a century.

Roubini does not deem the current slowdown in global growth merely a �soft patch.�

Furthermore, as the second round of quantitative easing, �QE2,� comes to a close at the end of the month, the renowned economist does not expect an outflow of capital away from emerging markets, as many investors had feared.

The flood of disappointing economic data released last Friday, puts another round of debt purchases by the Fed back on the table after sharp criticism and reluctance in the wake of QE2.

�The likelihood is growing,� said Cliff Waldman, an economist for the Manufacturers Alliance, a public policy and economics research organization based out of Arlington, Virginia. �I expect the Fed is going to look at the landscape and very sharp slowdown that we�ve experienced recently and looking at all the data they�re going to determine we need all the help we can get.�

He added that QE1 and 2 were intended to keep the U.S. from tumbling deeper into economic turmoil.

�Fed members aren�t under the illusion that this is going to stimulate anything,� Waldman said.

Instead, the preventative measure is intended to buy time and keep the floor beneath us.

The first round of quantitative easing came with a $3 trillion price tag, while QE2 cost upward of $600 billion.

Chairman of the Federal Reserve Ben Bernanke, said he expects the economy to strengthen in the second half of the year, however, the job market must be closely monitored.

Ultimately, what we need to do is create some certainty, conditions for people to feel comfortable and confident to invest in order for the economy to thrive.