NBR -- Roubini Global Economics Chairman, Nouriel Roubini on 0 Percent Interest Rate (Click for Video [9:17] and report)

NBR:

SUSIE GHARIB: Joining us now with more analysis about today's Fed decision, noted economist Nouriel Roubini, chairman of Roubini Global Economics. How Nouriel. How are you doing?

NOURIEL ROUBINI, CHAIRMAN, ROUBINI GLOBAL ECONOMICS: Very well. Hi. Good being with you.

The fault lines in the U.S.-China relationship have been increasingly exposed in recent weeks, with rhetorical barbs exchanged on trade, the treatment of foreign companies in China, strategic issues such as U.S. support of Taiwan and Tibet’s Dalai Lama, responses to Iran’s nuclear ambitions and especially exchange rates. Domestic consensus in the U.S. on the need for action with regard to the renminbi (RMB) is growing. Chinese leaders, including Premier Wen Jiabao, have recently hit back at the U.S. for what they characterize as interference in China’s security and economic affairs and U.S. economic mismanagement. Today’s note draws from two recent pieces of RGE Analysis, “U.S. China Tensions: Co-Dependency Pains” and “Who Will Buy the Treasurys?” in which we examine the quest for the new normal between the world’s largest creditor and debtor. Given the importance of the relationship to global trade, growth and security, RGE believes that the two countries will avoid a full-blown confrontation, but uncertain relations and tit-for-tat trade policies could constrain global growth.

Finding the New Normal

The friction suddenly afflicting the world’s most watched bilateral relationship stems from a struggle on the part of both China and the U.S. to find the “new normal” wrought by the changing dynamics of global economic and political power and influence since the financial crisis. To some extent, the financial crisis exacerbated ongoing structural changes that elevated the role of emerging markets in the global economy and increased their influence in debates on financial regulation, trade and currency policy. China’s ample resources, together with its ability to encourage its banks to lend and its state-owned enterprises (SOEs) to spend, also allowed it to be opportunistic, adding sharply to its resource holdings and supporting cash-strapped countries and companies during the recession. Yet its leverage on U.S. policy seems overstated, particularly as China’s willingness to diversify away from U.S. assets remains constrained by its desire for stable economy policy. Moreover, its economic apparatus is stronger than its security position. In this environment, there is a risk that one or the other player might overplay its hand or badly misinterpret the intentions of the other.

In part this normalization reflects the fact that the pressure for bilateral and multilateral cooperation, which helped stave off a near depression in 2009, has diminished. Given the role of the U.S. and China in sparking—and ultimately easing—the crisis, it was no surprise that bilateral tensions would be suppressed during this period as both countries looked inward to support growth. China, and to a lesser extent, some of the other emerging market economies, have not yet fully embraced the economic and political multilateral policy initiatives that will help mediate the changes and continuities of the global economic order. By the same token, the existing institutions still do not reflect some of these changes. The G20’s rise to prominence does provide a potential venue for such negotiation, but it remains too large and diverse to be efficient, and many different policy goals have been thrust onto its agenda.

Although political tensions appear to have heightened after December’s Copenhagen climate change meeting, in part due to the American perception that China’s behavior prevented a more ambitious agreement on carbon emissions from taking shape, at least some of the recent friction seems designed to play to their respective domestic constituencies. The U.S sells weapons to Taiwan; China threatens sanctions on U.S. defense contractors; President Obama meets with the Dalai Lama, and China cancels bilateral military parleys; meanwhile, both cry foul with respect to the other’s economic policies in their legislative meetings.

The lull in the cycle of diplomatic summits and visits since the Copenhagen meeting has contributed to the falling out. But the diplomatic cycle picks up again in April, with President Hu Jintao expected to attend an April summit on nuclear proliferation in Washington, while U.S. officials prepare for the next round of the U.S.-China Strategic and Economic Dialogue (S&ED) scheduled for this summer in Beijing, as well as upcoming G-20 meetings. Each side will probe for new sources of leverage, and further chiding in public may be inevitable.

Still, the past several months have revealed some dangerous misperceptions. Last year the Obama administration pushed for China’s cooperation on a global climate change deal, but expectations that China would ever sign a binding emissions deal that might slow its economic growth seemed optimistic at best. Recently, China appears to have pressed U.S. diplomats to foreswear future weapons sales to Taiwan in return for cooperation on Iran, a position the administration could not legally take. RGE does not think either side will seriously overplay its hand in 2010, but the risk is that, in areas where contact is infrequent and superficial, like military-to-military ties, one side may adopt policies or postures which inadvertently provokes the other. The first year of the Obama administration saw diplomatic exchanges increase across the board, with rather dramatic results on some under-the-radar issues like clean tech. While each side has taken the recent lull in diplomatic exchanges to recalibrate, the resumption of these exchanges may struggle under the burden of recent tensions. Meanwhile, other U.S. allies, ranging from Australia to the Europeans, seem to be calling on the U.S. to retain its firm position with China, a message that may pervade President Obama’s Asia trip next week.

The tit-for-tat trade tensions seem fated to continue simmering into 2011, given subdued global trade growth, but RGE regards it unlikely the U.S. will to declare its second-largest trading partner a currency manipulator, which would set in motion an economic and political response. China will drag its feet on Iranian sanctions, but ultimately it is not in a position to block any deal on Iran’s nuclear program if Russia is really on board. Yet in the medium-term the coincident political cycle in the U.S., China and Taiwan could prove dangerous, with each country holding presidential elections (or a Communist Party succession in China’s case) in 2012.

The Great Recession of 2008-2009 was triggered by excessive debt accumulation and leverage on the part of households, financial institutions, and even the corporate sector in many advanced economies. While there is much talk about de-leveraging as the crisis wanes, the reality is that private-sector debt ratios have stabilized at very high levels.

CNBC -- Wall Street's Fear Gauge (Click for Video 7:38)

CNBC -- The VIX is trading at the bottom of its two-year range, a possible signal that fear is leaving the market. Paul Britton, of the Capstone Holdings Group, and Nouriel Roubini, of Roubini Global Economics, share their insight.

The Great Recession of 2008-09 was triggered by the excessive debt accumulation and leverage of private agents – households, financial institutions and even a fat tail of the corporate sector – in many advanced economies. And while there is a lot of talk about deleveraging, the reality is that private sector debt ratios have stabilized at very high levels while, as a consequence of the fiscal stimulus to get economies out of a severe recession and the socialization of part of private losses, there is now a massive re-leveraging of the public sector with deficits in excess of 10% of GDP in many advanced economies and debt to GDP ratios expected to sharply rise and in some cases double in the next few years.

Check out all of the RGE Analysis and EconoMonitor contributions that were published this past week at roubini.com.

RGE Analysis: [Available only to RGE clients]

The Eurozone’s ‘Bay of PIIGS’ by Arnab Das, Elisa Parisi-Capone, Natalia Gurushina, Katharina Jungen and Jennifer Kapila Greece is the frontline of the battle to restore eurozone (EZ) fiscal solvency and discipline, improve and better align structural policies, reduce EZ divergences and sustain the euro. The battle encompasses Portugal, Ireland, Italy, Greece and Spain—grouped together as the “PIIGS” because they are at risk from the housing bust, the financial crisis or the ensuing deleveraging. RGE ranks 16 EZ members by domestic and external vulnerability, following the methodology in Gros/Mayer (2010). Their external index shows that Greece, Portugal, Ireland, Italy and Spain are the most vulnerable to external shocks, in that order. Applied to the domestic market, our analysis shows that Spain, Ireland, Portugal and Italy are most vulnerable on the home front (like unemployment and productivity).

Last week, Nouriel Roubini released an analysis exclusively for RGE clients. While maintaining his core projection of protracted U-shaped growth in the United States, Roubini argued that the risks of a double-dip recession in the United States are rising. The following content is excerpted from that analysis, the full version of which is still available just for clients on Roubini.com.

V, U and W

A slew of poor economic data over the past two weeks suggests that the U.S. economy is headed for a U-shaped recovery—at best—in 2010. The macro news, including data on consumer confidence, home sales, construction and employment, actually suggests a significant downside risk even to the anemic levels of growth which RGE forecast for H1. The U.S. faces continued challenges in H2—particularly as historic levels of fiscal stimulus fade—and appears far too close to the tipping point of a double-dip recession.

The central bank may end a 20-month peg to the dollar as soon as the second quarter, allowing a 2 percent one-step gain, and then let the currency strengthen another 1 percent to 2 percent in 12 months, Roubini said in an interview in New York. The yuan rose 21 percent between July 2005 and July 2008, when the government halted its advance to protect exports.

Check out all of the RGE analysis and EconoMonitor contributions that were published this past week at roubini.com.

RGE Analysis: [Available only to RGE clients]

U.S. Growth Outlook: Still Anemic and U-Shaped but Risks of a Double-Dip Recession Are Rising by Nouriel Roubini

A slew of poor economic data over the past two weeks suggests that the U.S. economy in 2010 is headed for – at best – a U-shaped recovery. The macro news, including data on consumer confidence, home sales, construction and employment, actually suggests a significant downside risk even to the anemic 2.7% growth which RGE forecast for H1. With the positive effects of the historic levels of fiscal stimulus due to fade this year, the U.S. faces at best a 1.5% growth rate in H2, which looks too close for comfort to a tipping point of a double-dip recession.

As the debate of the shape of the recovery in the United States rages on, Nouriel Roubini analyzes the macro data and finds it to be fully consistent with – at best – a U-shaped recovery.  However, the last two weeks of poor economic data suggest that the probability of a W, a double-dip recession, is rising. The following RGE Analysis U.S. Growth Outlook: Still Anemic and U-Shaped but Risks of a Double-Dip Recession Are Rising is available only to RGE clients.