ROUBINI: Economic Crises Will Lead to War - Moneynews Article

Economist Nouriel Roubini says fiscal austerity could bring economic calamity followed by war.

"I’m not predicting World War III but seriously, if there was a global financial crisis after the first one, then we go into depression: the political and social instability in Europe and other advanced economies is going to become extremely severe," Roubini tells Emerging Markets.

"And that’s something we have to worry about."
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"In the 1930s, because we made a major policy mistake, we went through financial instability, defaults, currency devaluations, printing money, capital controls, trade wars, populism, a bunch of radical, populist, aggressive regimes coming to power from Germany to Italy to Spain to Japan, and then we ended up with World War II."

Nouriel Roubini (Getty Images photo)

Roubini believes that increasing fiscal austerity at a time when private demand is falling again will lead to another global depression.

"We’re going to make exactly the same mistake like during the Great Depression, when we took away the fiscal stimulus too soon," says Roubini. “That is a huge risk right now."

Nor will China be exempt from economic ills. "China is going to have in two years its own hard landing," Roubini says.

"There’s so much overcapacity, from real estate to infrastructure to manufacturing that unless they change their growth model to rely more on consumption and less on fixed investment, eventually there will be a hard landing in China. So it’s not any more an issue of net exports."

The Wall Street Journal reports China's massive economic-stimulus program has supported near double-digit growth, but also stoked inflation, piled up debt and fueled another unwelcome development: social unrest.

In 2010, China was rocked by 180,000 protests, riots and other mass incidents — more than four times the tally from a decade earlier.

Other experts paint a similar gloomy future.

Pacific Investment Management Co., which runs the world’s biggest bond fund, expects advanced economies to stall over the next year, with Europe sliding into recession, underscoring mounting investor concern about the global economic outlook.

There will be little to no economic growth in industrial nations during the coming 12 months as Europe’s economy shrinks by 1 percent to 2 percent and the U.S. stagnates, said Mohamed El-Erian, chief executive officer of Newport Beach, California-based Pimco. That will leave worldwide expansion at about 2.5 percent, less than the 4 percent forecast by the International Monetary Fund this year and next.

BY: Julie Crawshaw

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