Nouriel Roubini: "We Are Going To See A Trainwreck If U.S. Doesn't Adress Fiscal Problem"

Nouriel Roubini appeared on Bloomberg Television with Tom Keene this morning from the World Economic Forum in Davos, Switzerland. Along with Gerard Lyons of Standard Chartered, Roubini discussed the global economy, emerging markets, and the fiscal crisis in the U.S. Roubini said that we're going to see a "trainwreck" if the U.S. doesn't "start to address this fiscal problem." He also said that "the bond vigilantes have not woken up in the U.S. in the same way as in the euro zone." Highlights can be found below, courtesy of Bloomberg Television. The video can be seen

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"Today there is a global economic recovery, but my view is still two-speed. Emerging markets, China, India, Asia, even Latin America are doing well. I think the recovery in the advanced economy is making us apart. There is still balance sheet repair in both the private and public sector. You see this especially in the periphery of the euro zone and Japan, the U.K. is almost double-dipping. Even in the U.S., the recovery is still weak. The banks are doing better of course--they're being built out, they're being recapitalized at least in the United States in the case of the euro zone, but we still have significant problems in Ireland, Spain, and so on. The global outlook is going to affect what happens to the banks. In the U.S., the down side risk is coming from housing double dipping, unemployment being high, the federal deficit and it's taking a load on local deficits. Some of the banks are going to be still struggling."

"We're not doing much about the budget deficit. The public debt in the U.S. may go next year from 60 to 90% of GDP. The public debt of the state and local government is already 20% of GDP. The local government another 20% of unfunded liability coming from their own employees' pension plans and the federal level, another 50% to 100% of GDP of unfunded liability coming from social security, Medicare and Medicaid. So in the U.S., the fiscal problem is very serious. The bond vigilantes have not woken up in the U.S. in the same way as in the euro zone. Unless the U.S. starts to address this fiscal problem, we're going to see a trainwreck."

"There is first of all a question of international economic policy cooperation. Many of the global problems are global, but policy international. If you are worrying about financial stability, global climate change, environment, energy security, food security, global imbalances--these are all issues that are global. Among the G20, there are significant disagreements. On macro policies, exchange rates, fiscal policy, monetary policy, and also disagreements on fundamental issues like trade, climate change, and financial stability."

"It does because fiscal austerity is necessary, structural reforms are necessary because if you don't do them you are going to have a crisis. In the short run, raising taxes and cutting spending has a negative effect on demand. Even structural reforms in the short run have a negative effect--to fire workers in the private and public sector, you have to close down firms that are not profitable. All these things are necessary, but there is political and economic pain in the short run and the benefits are all in the medium term. That's why weak governments in the United States, in the peripheral euro zone minority governments--even Germany is doing well economically."

"Countries in emerging markets, many of them are running current account surpluses therefore accumulating net foreign assets. They've gotten tired of investing in only U.S. treasuries--gives you very little--so over time there is now diversification into real assets--foreign direct investment, controlling, portfolio investment. The trouble is now that in addition to the risk of trade protection, there is now the risk of financial protections. You saw with the Dubai ports, as long as they wanted to invest in treasuries, no problems, but if they want to invest in the real assets, now there is a political backlash in the U.S. and Europe against that. That is going to be a source of conflict."

"What is happening in the Middle East, Tunisia, Egypt is not fully exogenous. You have this incoming white inequality, high unemployment among young people, also this sharp rise in food commodity prices. It is a huge deal. In emerging markets, it's leading to rising inflation, riots, demonstrations and political instability. In many of these emerging markets, 2/3 of the consumer price index is food, energy, transportation. When these things rise, there are significant social costs."