US recession warnings gain ground

WASHINGTON: Economists peddling dire warnings that the world's number one economy is on the brink of collapse, amid high rates of unemployment and a spiralling public deficit, are flourishing here.

The guru of this doomsday line of thinking may be economist Nouriel Roubini, thrust into the forefront after predicting the chaos wrought by the subprime mortgage crisis and the collapse of the housing bubble.

"The US has run out of bullets," Roubini told an economic forum in Italy earlier this month. "Any shock at this point can tip you back into recession."

But other economists, who have so far stayed out of the media limelight, are also proselytising nightmarish visions of the future.

Boston University professor Laurence Kotlikoff, who warned as far back as the 1980s of the dangers of a public deficit, lent credence to such dark predictions in an International Monetary Fund publication last week.

He unveiled a doomsday scenario - which many dismiss as pure fantasy - of an economic clash between superpowers the US and China, which holds more than US$843 billion (US$1 = RM3.11) of US Treasury bonds.

"A minor trade dispute between the US and China could make some people think that other people are going to sell US treasury bonds," he wrote in the IMF's Finance & Development review.

"That belief, coupled with major concern about inflation, could lead to a sell-off of government bonds that causes the public to withdraw their bank deposits and buy durable goods."

Kotlikoff warned such a move would spark a run on banks and money market funds as well as insurance companies as policy holders cash in their surrender values.

"In a short period of time, the Federal Reserve would have to print trillions of dollars to cover its explicit and implicit guarantees. All that new money could produce strong inflation, perhaps hyperinflation," he said.

"There are other less apocalyptic, perhaps more plausible, but still quite unpleasant, scenarios that could result from multiple equilibria," he added.

According to a poll by the StrategyOne Institute published last Friday, some 65 per cent of Americans believe there will be a new recession.

And the view that the US is on a decline seems rather well ingrained in many people's minds supported by 65 per cent of people questioned in a Wall Street Journal/NBC poll published last week. - AFP